Dollar Creating A Head And Shoulders Pattern

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 set up 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 its bearish head. One of the 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 pattern's 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, each 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.

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