Oddities in the US Dollar ETF UUP

Dec 11, 2008: 11:40 AM CST

There was a strange, large scale overnight gap in the UUP Bullish US Dollar ETF which wasn’t confirmed as strongly in its bearish counterpart, the UDN.  Let’s take a look at these two ETFs on their daily chart to see if we can get a better picture.

Bullish Dollar ETF – UUP:

Price gapped from $26.00 down to $24.00 overnight, a sudden and violent drop.  The $24.00 level quickly caused a bounce in price and surge to the upside, so we’re currently trading higher than the open, but lower than yesterday’s close.  The strange thing was I intended to write a post about the UUP noting the shaky foundation upon which it stood and was going to hint that I felt a break of the 50 EMA was likely yet to come.  I didn’t expect such a gap, however.

Stepping back, we see price coming into highs at resistance at $27.00.  A multi-swing negative momentum divergence formed and volume decreased, both of which served as non-confirmations of the higher price levels.  Today’s size of the gap is surprising, but the bearish structure is not, given the multiple positive momentum divergences that have formed in oil and some other commodities (which trade inverse the US Dollar Index).

Let’s compare the large-scale morning gap in UUP to the bearish counterpart ETF the UDN.

Bearish Dollar ETF – UDN:

Not surprisingly, we have the mirror image of the above, but without the sharp overnight gap.  Price moved only from $25.50 to $26.00 as the gap is moving towards yesterday’s close at the moment.

Structurally, we see the multi-swing positive momentum divergence, pick-up in volume as price rises, and breaking of both the 20 and 50 day EMAs, and an official positive trend reversal (thanks to higher highs and higher swing lows).

Of course, this positive momentum is occurring on a bearish ETF which reflects weakness in the US Dollar Index (and strength for commodities).

Speaking of the US Dollar Index, let’s take a look at its weekly chart and note a possible Elliott Wave interpretation.

US Dollar Index:

We did mark a new momentum high in October, hinting that higher prices may be yet to come after a pullback/retracement in price which could take us to the $82 to $83 level which would reflect confluence of the 20 and 200 period moving averages, as well as a decent Fibonacci retracement target (the 32.8% retracement of the move off the bottom stands at $81.93 while the 50% retracement off the move from Wave 2 at $76 stands at $82.20, reflecting Fibonacci confluence around the $82.00 zone).

According to this view, we would have a bit further to move to the downside before possibly making a run higher early in 2009 for a supposed terminal wave 5… but that’s another story as well.

Keep watching the US Dollar Index and how the movement might affect the broader market and key commodities.

Corey Rosenbloom
Afraid to Trade.com

6 Comments

6 Responses to “Oddities in the US Dollar ETF UUP”

  1. Vasu Says:

    Hi Corey :
    Thank you very much for the wonderful explanation .Could you please suggest me where I can get a real time chart of this dollar index ? And also with my little experience in trading I understand that such a huge tail in downtrend is utterly bearish and that prices will visit the end of the tail very soon..Am I correct or is it just some “theory ”
    thanks
    Vasu

  2. Vasu Says:

    Hi corey :

    With my little trading experience I understand that it is utterly bearish to have such a huge tail in downtrend and that prices will visit the end of that tail soon. Is this just a theory or is it valid ?

  3. Dave W Says:

    Corey, I think people bailed on the open on UUP as the $Dollar Index violated it’s Elliott Wave wave (4) potential triangle by going below 84.71 before the stock market opened – thus people dumped UUP

  4. Corey Rosenbloom Says:

    Vasu,

    I use TradeStation to which I subscribe to the data for the futures contract – I have to wait until the close to post the $USD charts because StockCharts only makes it available as end-of-day. I use the UUP as a proxy when I need to show something to readers intraday. I don’t know of a site off the top of my head that offers real-time Dollar Index (futures) quotes.

    Regarding the tail, I think the early morning print was sort of a fluke so I tend to discount it gently, but that doesn’t change that it exists on the charts. I am bearish the dollar short-term so I could see us heading lower but we’ll have to see how far it goes, whether or not it realizes the $24 price in the UUP anytime soon.

  5. Corey Rosenbloom Says:

    Dave,

    I would tend to agree, though I’m surprised it happened so quickly and then was over just as quickly. It was a nasty print and was murder on those people who had reasonable market order stops beneath the rising 50 day EMA – killed them.

    Prints like that tend to upset me, not so much for me, but for the people who believe they are following classic rules in terms of “place stops just under a moving average” or the like and when this happens, they factor in their risk/reward ratios and now they’re looking at far larger R-value losses than they anticipated… only to have price sharply reverse up on them and trade higher such that a stop at the level the chart was printed wouldn’t be much of a big deal to them.

    Price is king but some things just don’t seem totally fair sometimes.

  6. Smallsmatt5 Says:

    There is tax benefits in the ETF. The capital gain is less in this investment but the ETF is a result oriented investment