Can the Dollar ETF (UUP) Finally Break Out?

Zacks

The recent mood in the market has surely been a volatile one to say the least. Last week, the S&P 500 breached the psychological level of 1500; however, it quickly bounced back from there the subsequent trading session. Of course recent economic data from the U.S as well as across the Atlantic haven’t been entirely positive as well (see Two Amazing ETFs For S&P 500 Exposure).

The somber looking GDP reading from the Eurozone and the dip in U.S. Housing Starts number caused a sell-off from the equity markets. Furthermore, the drama out of the FOMC meeting has added to the already tense sentiment in the market. Certain members of the Fed are determined to decelerate or even stop the monetary stimulus.

Also, the ultra loose monetary policy currently being implemented by the Bank of Japan, is having a profound effect in the currency market. The yen has lost around 15% versus the U.S. dollar in the past few months, while uncertain politics have weighed on the euro as well (read Three Different Types of Currency Hedged ETFs).

Against this backdrop, let us have a closer look at the chart of PowerShares DB U.S. Dollar Index Bullish ETF (UUP) which hints towards more upside for the U.S.Dollar in the near term.

UUP had witnessed a substantial sell off since early September as the U.S. dollar was in a downtrend from September 2012 onwards.

This was mainly thanks to the likes of Quantitative Easing implemented by the Federal Reserve since mid September. It was that time when riskier asset classes like equities and commodities surged, but the U.S. dollar witnessed devaluation.

The dollar ETF has, however, very recently shown bullish signs and broken out from the descending triangle pattern on the upside.

This breakout can be perceived to be weak as it was not supported by strong volumes. On the contrary, volumes in UUP have witnessed a substantial decline from earlier this year (read Inside The Only Singapore Dollar ETF (FXSG)).

Nevertheless, this breakout seems to have great momentum. Still, it is prudent to note that the current levels for UUP are extremely crucial for the currency ETF. UUP is currently trading near its 200 DMA line (green), which is a stiff resistance for this ETF.

In fact, UUP earlier had tried to break out above the 200 DMA line in early November but failed to do so. This was characterized by the 100 DMA line (red) death crossing with the 200 DMA line. This bearish cross had resulted in a rangebound trading activity for the ETF which also established a crucial support level of $21.60 for UUP.

However, with the recent breakout of the triangle it seems that finally the ETF will be able to conquer its 200 DMA line. Also, looking at its vital trendlines, the 50 and 100 DMA lines, both are upward rising which probably hints towards positives for the dollar ETF (read Brazil ETFs in Trouble?).

If that wasn’t enough, the fundamental aspects of the situation are looking good as well. The euro and the Japanese yen together account for a lion’s share of 71.2% of the dollar ETF. These are followed by the British pound having an 11.9% weighting in its portfolio.

With the recent monetary easing measures in Japan (and the G-20 summit overlooking it) coupled with a volatile trading week ahead in Europe ahead of the Italian elections, the U.S. dollar looks favorably poised.

And this is even without considering the possibility of a deceleration in the domestic U.S monetary easing program which looks remote at present (read Japanese Yen ETFs: Any Hope in 2013?).

It is also worthwhile noticing that the ETF is overbought as this point, but it should not be much of a worry. This is because the overbought condition is likely to be neutralized by range bound trading activities over the course of the next few days.

This is more likely to happen after the 200 DMA breakout when the ETF goes into highly overbought territory. In any case the range-bound trading sessions after the breakout will only help to consolidate those levels.

However, a long position at current level is very dicey. And it is crucial for investors seeking a long position in the ETF to actually witness the resistance breakout of the 200 DMA line. That will surely fuel its surge upwards.

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