So, then there’s the sister question I usually get when asked about the euro: What about the dollar?
In contrast to the euro, the dollar had a great run from mid-March to June. But since June, the dollar has had quite the sell-off. So, let’s see if we can answer the same euro questions with regards to the dollar: Is the dollar still a short or should you be looking at a potential long position?
Please review the chart of the UUP, which is the Powershares Dollar Trust ETF, with my added notations:
The UUP is a way for investors to buy the dollar without actually buying the currency. You will see the March to June rally I mentioned above and the current sell-off. I have drawn an important resistance in red and (2) important supports in blue.
First, please notice the up trending support. If you had been following the UUP and noticed the break of that support level in June, wouldn’t you have probably entered a short position? Probably. Well, now look at the longer-term horizontal support at around $23.75. Is it surprising that we bounced right at that support? Probably not. So, what might you expect the UUP to do if it happened to break below the support at $23.75?
Next, let’s draw our attention to the most recent down trending resistance. If you had been monitoring the UUP last week when it broke through that resistance, wouldn’t that have been a great time to enter a long position in the UUP or dollar? Of course.
The Tale of the Tape: The breaks of support and resistance levels are usually great potential signals for entering trades. Recently the UUP broke through its resistance, which seems to be a great sign to look for a long entry on any pullback. However, if the UUP were to break down below the $23.25 area of support you might have a great opportunity to short the UUP or dollar.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT