UUP). – Andrew Thrasher

U.S. Dollar Bullishness Hits Record High

Posted on March 26, 2013 by Andrew Thrasher, CMT

I’m pretty busy this morning but wanted to get this one chart posted. The dollar has been rallying since February and the PowerShares U.S. Dollar Bullish ETF ($UUP) is up a little over 4% from its 2013 low. This bounce in the dollar has caused a large shift in bullishness for the U.S. currency, with long positions hitting record highs based on COT data.

Here’s a chart produced by SentimenTrader via Business Insider that shows the number of net long positions of large speculators (which are primarily hedge funds) in the dollar hitting record highs. It’s important to note that past peaks in net long positions have not been associated with highs in the dollar. Just like in equities, we typically see sentiment top out before price does. So while it’s possible for the dollar to take a breather, this frothy sentiment isn’t as short-term bearish as some would have you believe.

Source: The Number Of Bets On The US Dollar Has Never Been Higher (Business Insider)

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Emerging Markets Approach Support

Posted on March 14, 2013 by Andrew Thrasher, CMT

While we have been watching the U.S. equity markets tick higher, the emerging markets don’t seem to be fairing as well. Today we are taking a look at the iShares MSCI Emerging Market ETF ($EEM). Since the start of the year $EEM has been hitting lower lows and underperforming U.S. large caps. The same price action can be seen in China ($FXI), which has also been weakening over the last couple of months. The iShares Emerging Market ETF has just over 17% of its allocation in China stocks, giving this Asian market a strong influence in the ETF’s price action.

The below chart shows the trading pattern being created in $EEM with price approaching support, presently at $42.50. It appears the test of support will likely be more of a function of ‘when’ rather than ‘if’ as the U.S. dollar continues to rise, applying pressure to foreign markets due to their negative correlation.

To gain interest in emerging markets traders will likely be looking for some degree of outperformance against U.S. equities. In the bottom panel of the chart we can see the relative performance of $EEM and $SPY, when the line is falling it tells us that $SPY is outperforming (rising more or falling less) than $EEM. The green dotted trend line, which outlines the down trend in relative performance, likely needs to be broken for any meaningful advance to take place in $EEM.

As long as we have a strong dollar and see weakness out of China, it will be very difficult for emerging markets to gain their footing. This is a great example of using outside markets to gain understanding of why a security like $EEM is performing the way it is.

Dollar Creating a Head and Shoulders Pattern

Posted on December 19, 2012 by Andrew Thrasher, CMT

No, the U.S. dollar doesn’t have a dandruff problem (sorry, bad joke). There seems to be a lot of discussion, at least by those I follow on Twitter and in the blogs I read about the bearishness of the dollar. There has been a head and shoulders chart pattern that’s setup in the PowerShares US Dollar Index Bullish ETF ($UUP) that gives credence to those negative on the dollar.

This pattern gets discussed pretty often as it lurks it’s bearish head. One of things that frustrates me when I see it mentioned is the lack of analysis given to volume. With price action creating the necessary chart pattern, this only gives us half the equation. What many people leave out is the necessary volume requirements associated with a head and shoulders pattern (H&S). Like many setups, volume typically trails off during the patterns completion. H&S is no different.

The largest amount of volume should be observed during the top of the left shoulder, when the head is created volume should be slightly lower and then even lower when we get the right shoulder. By each rally attempt being accompanied by weaker volume we can see the bears stepping in and whacking down any attempt at an advance. This is part of what makes the pattern bearish.

When looking at the above chart of $UUP we can see that volume does in fact confirm the H&S pattern that price is showing us. From here we are looking to see if price falls below the trend line, completing the pattern. It’s important to remember that oftentimes when price breaks the ‘neck line’ of a H&S pattern it will bounce and re-test. This can act as a confirmation of further weakness if what once was support becomes resistance.