After a rough first half of the year, the U.S. dollar is starting to show signs of bottoming on the heels of a strong U.S jobs report and improving economic data.
In July, the economy added 209,000 jobs as the unemployment rate dropped to 4.3%. But the bigger piece of news was that wage growth saw its biggest month-over-month gain since October. On the heels of those strong numbers, and other signs the economy is strong, the dollar rose off a one-year low.
One way to trade the dollar is by using the PowerShares DB US Dollar Index Bullish ETF (UUP), which provides inverse exposure to an index of USDX futures contracts that rises in value as the dollar appreciates relative to a basket of world currencies. After being beaten down for the first half of the year, there are signs that a bottom might be in place for the UUP and that it might retrace some of its losses.
Chart source: TradingView
UUP's chart is showing a couple bullish technical signals. First, the Moving Average Convergence Divergence (MACD), which measures the direction of the momentum in a stock, had a bullish reversal indicating a new uptrend. Second, the UUP found support at $24, which is the exact low of 2016. This can be considered a double bottom and now makes the $24 level very strong support given that it has held this level twice on a long-term time frame.
Looking ahead to a potential bounce, using Fibonacci Retracements can be helpful in spotting targets and resistance level. The first test of the UUP bounce will be $25. This represents a 38.2% retracement of the sell-off from the start of the year. The next target would be $25.37 which is the 50% retracement of the move. Should the UUP get to this level, how the ETF reacts at these levels will be a good indication as to whether the bounce was short-term in a new long-term downtrend, or if the bounce represented a change in the long-term direction of the dollar. For the time being, using $24 as a pivot point looks to be the smartest approach to trading the dollar. Should the UUP break below $24, then the downtrend should continue and the bounce on Friday would become irrelevant.
The Bottom Line
The U.S Dollar, represented by UUP, had a strong bounce back Friday afternoon after better-than-expected July jobs numbers. After suffering major losses all throughout the year, the greenback potentially looks primed for a move back up. The $24 level on the UUP acts as a major pivot point, because above it, a bounce seems likely given an emerging positive technical backdrop.