While the U.S. Dollar Index didn't do so well Friday, it is getting ready to generate a Trend Model buy signal. Note on the chart below that the 20-EMA is less than a hair away from crossing up through the 50-EMA, which will mechanically generate the buy signal. Note also that the Index broke above the top of a descending wedge formation. Friday's decline, so far, was the expected snapback to the line, which is now support. Unless there is more followthrough to the downside, I'd have to say this chart is bullish.
Now let's look at the chart of the Dollar Index Bullish ETF (UUP), which is supposed to track the Dollar Index. Note that the price barely penetrated the overhead resistance on an intraday basis, and failed to close above it. More interesting is that the price relative line has a gradual downward slope and a steep drop in the last three weeks. This means that UUP is normally weaker than the Dollar Index, and it has been exceptionally weak more recently.
So what should we believe, the Index or the ETF? The ETF trades on supply and demand like a stock. The Dollar Index simply tracks the U.S. Dollar's strength against a basket of currencies. If I'm going to try to forecast the future path of the dollar, I'll use the Dollar Index chart. If I'm trading the ETF, I'll use the UUP chart.
Is UUP giving us advance warning that things are about to go south for the dollar? Possibly, but for now I'll believe the Dollar Index, because UUP has historically underperformed the Index. If the Index continues higher, UUP is certain to follow.
For more clarification, let's look at the Dollar Index weekly chart. The price breakout looks pretty solid, and the PMO has crossed up through it EMA. We should have positive expectations unless this picture changes.
Bottom Line: The Dollar Index has been performing well for about six weeks, and technically we expect it to continue for a while. UUP doesn't look as promising, even though it is supposed to track the Dollar Index, so we would take our trading clues from the UUP chart. I think this conflict could be resolved as early as next week.