Bullish Divergences and Developing Intraday Structure in US Dollar UUP

Jan 30, 2011: 5:26 PM CST

With multi-swing divergences happening in the US Stock Market, what is the similar picture like on the inversely correlated US Dollar Index?

As it stands now, it’s bullish but in its earliest stages of potential life.

Let’s take a look and learn a quick lesson in confirmation via a simple inter-market cross-check.

The US Dollar:  60-min

I posted Thursday on the clear divergences in the S&P 500, and then followed up Friday – after a 20 point move down – regarding “Why Divergences Matter” when the SP500 is at 1,300.

While the S&P 500 was deteriorating, the US Dollar Index – intraday as well – was clearly strengthening.

This is what you’re supposed to see – at least in the current market environment – and taking the extra step to cross-check the US Dollar Index was helpful in seeing if everything’s playing out like it is supposed to (according to the charts).

Before we get to what’s going on now, look back to early January when the US Dollar Index rallied up in a mini-five wave fractal that showed a quadruple-swing negative momentum divergence.

Price rotated (consolidated) at the $81.00 index level (known resistance) and then broke sharply lower which took us to the present $78 level where counter-divergences have now formed.

I’m a  huge fan of 5-wave fractals into clean divergences like this.

Now, moving on to today, with the S&P 500 having trouble so far overcoming 1,300, and showing many divergences, the Dollar is showing the opposite picture.

You can’t look at internals on the Dollar, but you can look at momentum.  The 3/10 Oscillator pushed to a low on January 12th and 13th, calling for LOWER prices yet to come and they did… and did… and did.

Moving under $78, the index showed multiple positive divergences along the way which suggested the downside pressure was weakening, suggesting the potential for a breakout and potential set-up on the breakthrough of the falling trendline.

That happened Friday and it was met with a Kick-off signal – a new momentum high as price is not making a new high (a power-signal in many cases).

A caveat – a similar situation formed on the triple-swing divergences on January 19th where the Dollar Bulls were only able to swing the price up in an “ABC” corrective fashion – a retracement, not a reversal.

That’s certainly possible again as we break a similar trendline with similar momentum divergences – only the present divergences stretch further back than those on the 19th.

Anyway – the quick story is that for short-term oriented traders, as long as the Dollar stays above the $78 level or even the $79.50 recent swing low level, we could see at a minimum another little ABC push up to $79 or  just shy of $79.

If stocks really start to tumble (breaking their daily support levels), then we could see more of a short-term intraday reversal up instead of a retracement.

There’s never a guarantee of any method working 100%, but I’ve grown to love intraday divergences and the signal that comes from trendline breaks – if anything for the tight risk to potential reward inherent in these sort of set-ups.

Either way, the multi-swing divergences in the Dollar are something for traders to watch as we go forward.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

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2 Comments

2 Responses to “Bullish Divergences and Developing Intraday Structure in US Dollar UUP”

  1. Tweets that mention Bullish Divergences and Developing Intraday Structure in US Dollar UUP | Afraid to Trade.com Blog -- Topsy.com Says:

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  2. Corey Rosenbloom, CMT Says:

    Quick update – looks like this may have been one of those mean ole' bull trap scenarios – at least off the open Monday morning.