Bullish On the US Dollar Index

Bulls in the US Dollar have all but disappeared, which as always makes me take notice. The most predictive indicator of a trend change is an extreme consensus, which we now have in terms of the dollar's fate. The investment community has resigned the dollar to slow death by Berneke. Ironically, QE2, which should have been the death knell of the dollar instead sparked the dollar back to life, sending the dollar strait up. While fundamental analysts must have been scratching their heads at this, the technicals at that period looked very encouraging.

Chart 1: UUP Dollar Bull ETF (Click to view full size)

The QE2 announcement occurred near annotation A. While that should have sent the dollar crashing, instead, occurring with an extreme in bearish sentiment, a perfected TD-Sequential, TD-Buy Setup was recorded. The "look" of the decline appears to be a large 3 waves of momentum or an ABC correction, implying that the trend at one degree higher is up. Looking at annotation B and C, negative directional movement (-DMI) as well as the average directional index (ADX), and disparity between the close and the 200 DMA all became extreme, reaching levels that, in the past, have occurred at trend reversals. In fact, the last time these indicators became that extreme was in late 2009, which preceded a huge multi-month rally. At annotation D, we see a momentum sell signal that is very short, and barely breaks the lows, which is then immediately reversed  at annotation E by a momentum buy signal that takes out the highs of the previous momentum buy signal, a generally reliable signal of trend reversal.

That being said the UUP has rallied sharply, with many indicators of momentum registering overbought levels; a correction should now be expected, though position traders should use the correction to get long the dollar index with a stop just below the November 4 lows. Looking at a 4 hour chart we can get clues as to when to expect an end to the current correction on a daily basis. 

Chart 1: UUP 4 hour bars (Click to view full size)

 The current TD-Sequential TD-Buy Setup count is currently at 6. In terms of momentum, fast stochastics is reading oversold. Momentum is still in the middle of the range but falling. I'll be watching for oversold levels, fast stochastics to turn upward, and possibly a completed TD-Buy Setup, possibly in the next few days.