After a steady slide from its highs at the beginning of the year, it looks like the U.S. dollar is poised to bounce back.

The PowerShares DB US Dollar Bullish Fund ETF (UUP​) has broken out of a multi-month inverse head and shoulders trend reversal pattern with conviction as volume spiked to a 12-day high. A daily close occurred above the neckline (approx. $24.50) thereby confirming strength of the breakout and providing a trend reversal signal, from a downtrend to an uptrend. Given this renewed strength in the dollar, UUP can be anticipated to continue to trend higher.

Source: Tradingview.com

A few characteristics of this particular inverse head and shoulders pattern add to its bullishness. First, we have an upward sloping neckline due to the fact that the most recent swing high of $24.47 exceeded the prior swing high of $24.39, by itself giving a bullish trend continuation signal. This indicates that buyers have gotten more aggressive than they might otherwise. Further supporting this dynamic is the higher right shoulder. Moreover, there is close to perfect time symmetry in the relationships between the two shoulders. The left shoulder formed in 26 trading days and the right shoulder in 25 trading days.

Furthermore, we have additional confirmation of strength suggested by the bullish moving average crossover that just occurred with the 21-day exponential moving average (EMA​) crossing above the 55-day EMA. Finally, we have a strong breakout day with price ending near the high of the day.

Source: Tradingview.com

When looking at where UUP might next be heading, we can start by calculating a minimum target based on the price structure of the inverse head and shoulders pattern. By taking the height of the pattern and then adding that price difference to the breakout level, we arrive at a potential minimum target of approximately $25.25. The significance of that price zone is enhanced when including previous support and resistance ($25.22 to $25.29), the 50 percent retracement ($25.24) of the full 2017 downtrend, and an internal downtrend line that goes through a similar price area. Together, these indications show a potential resistance zone of some significance from around $25.22 to $25.29.

The next higher price zone of significance then looks to be around the 61.8 percent Fibonacci retracement ($25.62) of the full downtrend, as well as prior support and resistance identified at the end of prior swings. Roughly, this potential resistance zone is around $25.52 to $25.65.

The Bottom Line

  • A decisive bullish breakout is occurring in UUP.
  • Multiple indications confirmation underlying strength.
  • Multiple relatively clear upside targets can be identified from its price history

 

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