If you just crawled out from under your rock, Europe is in trouble which means the U.S is considered safe. Who would've thought. What this has done has caused a rally in the dollar as people moved from Euro's or Dollar Bills y'all. The rally could potentially continue as well based on the chart. The Dollar index or /DX has formed a Bull Flag- a bullish chart pattern. Let's take a look at it
To make a Bull Flag you need 3 things: 1. The Flag Pole, 2. The Flag and 3. The Break out.
1. The Flag Pole: the flag pole is the rally from 78.65 to 81.45. This is a 2.80 size flag pole. Which means the price target is 2.80 points from the break out.
2. The Flag: The Flag is formed as a period of consolidation after a bring move up and on shrinking volume. The consolidation trends downwards and forms a channel- This is the flag. Right now we have the flag that has formed from the 81.45 high and has trended lower.
3. The Break Out: This is what we are missing for this move. Once DX breaks out of this pattern it would mean a 2.80 point move. Put DX right around 83.40
Where to?: Look at the DX chart and looking where the target move is too, this breakout makes sense if it does happen. The move out of the flag should give DX the momentum to break out above long-term resistance at 81.50. This has capped DX's upwards movement since 2010, so a break out would be strong. In addition the target puts DX right at some longer-term resistance so this would be a logical slow down point for the move.
What Does this Mean for the Market: Well if the dollar does rally, good bye market. This has been the correlation for a while now. The run up for the dollar since 12/9 has corresponded with the decline in the market. So another 2 point move up could mean another 5%-10% drop in the market. But the dollar up also means Gold and Silver down. Remember the "Murder Cross" on Silver and its bearish implications.
All eyes should be on the dollar and the bull flag!
How to Play It: Of course the best way for the Piker to play this move is to use the UUP ETF, While it did not form a bull flag it has formed a pennant/triangle and this is the same type of bullish continuation pattern as the bull flag. This move puts UUP at around 23.10 from a break out of 22.56.
Check out more post at PikerTrader.com
