A Look at Two ETFs: FXE Euro and UDN Bearish Dollar

Oct 29, 2009: 11:08 AM CST

Last night, I took a look at the Bullish US Dollar ETF (symbol UUP) and noted its structure, positive divergences, and moving averages to watch.  This morning, let’s take a look at two other related, though inversely correlated ETFs for the opposite perspective.

Let’s start with the Bearish US Dollar ETF (symbol UDN) to note a ‘mirror image’ structure and then take a look at the Euro Currency trust ETF (Symbol FXE) to show how the Euro trades inverse to the Dollar.

What we see in the UDN is a ‘mirror image’ or ‘flipped’ version of the UUP fund.

Instead of positive divergences in momentum, we see a lengthy negative divergence, which is a non-confirmation (of momentum) with higher prices.

Beyond the momentum divergence, we see a lengthy negative volume divergence as well, further non-confirming the higher prices.

There has been an increase in relative volume in October, but clearly not to the levels of the May/June 2009 period when prices were lower.

Non-confirmations do not necessarily ‘mandate’ a reversal in trend, but they serve as yellow caution lights that hint at possible cracks under the surface.

In strong trends, we need to pay closer attention to the 20 and 50 period Exponential Moving averages, which both tell us structure (in that the 20 is above the 50 = strong uptrend) and trading opportunities (buy pullbacks to the 20 or 50 EMA).

A price break beneath the 50 EMA would be an early warning signal that the negative momentum divergences were ‘catching up’ with price and that the odds of the trend reversing would be higher.

As such, watch the $28.00 per share level on this ETF.

Now, let’s take a look at the Euro Currency Trust – FXE:

Without explaining the exact same structures, just reference that the FXE Euro is positively correlated to the Bearish Dollar Fund and inversely correlated to the Bullish Dollar Fund.

In the US Dollar Index construction, the Euro comprises 57.6% of the Index so it’s not necessarily a perfect negative correlation, but very close.  Remember that currency pairs are quoted in “crosses,” such as the EURUSD (“Euro-Dollar Cross”).  It’s essentially a ‘relative strength’ relationship.

For those who don’t trade FOREX pairs, currency ETFs offer acceptable solutions to trade currency markets without massive leverage or a FOREX account.

And it’s also the same picture – as the FXE Fund rose, volume (participation) declined all the way up… as did the 3/10 momentum oscillator.

The level to watch on this fund is $146.  Price could continue its uptrend, bouncing solidly off this level which would imply a continuation of the current uptrend, but any breach/break of $146 would be a bearish sell signal and hint that odds then favored a trend reversal.

Until then, let’s keep watching these levels very closely.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

5 Comments

5 Responses to “A Look at Two ETFs: FXE Euro and UDN Bearish Dollar”

  1. ngbstl Says:

    Does one of these (UUP, UDN, FXE) stand out as a superior hedge for US equities versus another? Does UUP, UDN have higher correlations to equities than FXE?…

  2. ngbstl Says:

    Does one of these (UUP, UDN, FXE) stand out as a superior hedge for US equities versus another? Does UUP, UDN have higher correlations to equities than FXE?…

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