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