December 15th, 2010

Revisiting the DXY, UUP and UDN

In “$US: A Reversal or Consolidation Pattern” of October 20, I wrote:

“Technical analysis is probably applied more often and with less controversy to foreign exchange than it is to stocks ….. The $US exchange rate has been in a narrow range since 2004 ….. Some might see it as a partially formed complex inverted head-and-shoulder with the neckline currently at around 87.50. Others might see a symmetrical triangle with the exchange index currently bouncing off the bottom trendline ….. I’m not sure which I think is the more likely outcome. To much national debt=another move down. Agreement among the finance ministers=reversal pattern and move up. What say you?”

Up to now, the supporting trendline held and the value of the $US relative to other currencies has temporarily improved. I say “temporarily” because the currency has now balked at a zone that’s been a support several times over the past 18 years (click on images to enlarge):

Although not very volatile, if you want you can play the foreign exchange market through the following two ETFs: UUP (a long position in the $US) or UDN (a short position). I indexed both of these ETFs against DXY [since UDN moves contra- to UUP they or on left and right vertical axes], the US Dollar Index against a basket of major trading partner currencies (the first chart above), and found that they move fairly closely together ever since their introduction in February 2007:

There are several other more volatile approaches if you believe the $US will ultimately break below the lower boundary trendline of that symmetrical triangle including: commodities of all sorts, precious metals and shorting US Treasuries in the expectation of higher interest rates that probably will be demanded by foreign holders of those bonds that offers them some protection against declines in the value of the Dollar.

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  • Jonathan Guillou

    Good everning,

    What is your opinion on the "possible" head-and-shoulder on the US Dollar Index?

    If you look at a daily chart one one-year frame?!

    The neckline was broken and it seems it is retesting it from below?

    What are your thoughts?

    Thanks.
    J

  • Joe

    Jonathan, sorry I don't see what you see (H+S or inverted H+S). I can see a move to 83.50 in DXY but don't believe it will go higher for all the reasons other dollar-bears elsewhere have mentioned. If you're a short-term player then from 80.27 to 83.50 could work for you. I'm longer-term and don't see further upside from there.