Dollar Fund Breakout Rings a Familiar Bell

The UUP rally above a key trendline could be the start of a longer-term rally

by Bernie Schaeffer

Published on May 1, 2018 at 7:55 AM
Updated on May 1, 2018 at 7:55 AM

Strength in the dollar was a predominant theme last week, and the resulting breakout in the PowerShares DB US Dollar Index Bullish Fund (NYSEARCA:UUP) has certainly been eye-catching. As of Friday's close at $24.03, the exchange-traded fund (ETF) was dead-even with its 2017 year-end price -- marking the first weekly settlement so far in 2018 where UUP hasn't been negative on a year-to-date basis. (The dollar tracker has finished just four sessions above $24.03 since the start of the calendar year, including last Thursday.)

Equally notable is the fact that UUP ended last week by collecting its third consecutive close above its descending 160-day moving average -- a technical feat last accomplished just over a year ago, in mid-April 2017. After briefly providing support in March and April 2017, this trendline had more recently served as a steadily descending ceiling that UUP couldn't quite manage to "formally" test during its fourth-quarter 2017 burst of strength.

And while the latest bounce in the buck is still in its fledgling stages, it's interesting to note the similarities between last week's price action and a similar 160-day breakout that occurred just about four years ago.

From its July 9, 2013 closing high at $22.93 to its May 6, 2014 closing low at $21.16, UUP shed 7.7% of its value -- and over this time frame, a few minor rally attempts were stifled by the descending 160-day moving average, similar to the slumping price action that played out following the late 2016-early 2017 highs. But after the dollar fund's decisive gap above its 160-day on July 22, 2014, the shares went on to rally more than 23% into their March 13, 2015 closing high at $26.49.

The same pattern played out on a somewhat smaller scale in the final months of 2016. After spending the better part of three months bumping unsuccessfully up against its overhead 160-day moving average, UUP finally caught a major tailwind in early October. From the Oct. 3, 2016 close above the 160-day to its eventual closing high at $26.70 on Jan. 3, 2017, the fund rallied just about 8%.

And if this latest UUP move above its 160-day moving average continues to unfold like those in the past, traders will want to keep an eye on the fund's 14-day Relative Strength Index (RSI) to determine when the rally might be exhausted (whether temporarily, or on a longer-term basis). This metric arrived at 69.4 at Friday's close, and previous post-160-day breakout rallies in UUP in recent years have not lost momentum until the RSI rose as high as the 80 level.

uup 160-day moving average

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, April 29.

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