US Dollar (UUP)

Long the US Dollar is the next "don't fight the Fed" trade. With the strong Payrolls report for October and Janet Yellen's comments this past week, the Fed Fund Futures are now predicting a 70% chance of an interest rate increase in December.

The market responded on Friday and appears to have begun repricing assets to account for a rate hike in the near future. As we saw at the end of last week Lg-Cap stocks were flat, Small Caps led, Bonds got hit, along with Gold and interest rate sensitive groups. The two most positive reactions we saw were in Financials and the US Dollar. This is textbook "higher rates" rotation.

Financials and the Dollar are two groups that stand to benefit the most from a rate increase (tightening Fed). I prefer the Dollar trade currently because of its lower correlation to the SP500. Financials will still be beholden to the weight of the stock market while the Dollar will not. I also believe that while the market is in suspense for this change in policy, Lg-Cap stocks will be more volatile. Not to mention the strong rally stocks have recently had on the back of a more dovish Fed theory. Now with uncertainty being placed back into the market, things will likely be more choppy and range-bound until December.

US Dollar Weekly chart (UUP)

After consolidating its strong rally from 2014, UUP has traded in a tightening formation for the better part of 2015. It broke out of this pattern Friday triggering a continuation of the previous trend. 

For risk management purposes we can use the support lows at 24.40 on a weekly closing basis. Any move back below that would suggest this analysis is wrong and a more neutral Dollar position would be needed.

Our indicators all align to suggest a strong risk/reward setup. Volume surged the week of August 24th but has since tapered off. This week's increase in volume is a confirmation that strong buyers are behind this new breakout.

The MACD indicator has reset at the zero line and is now crossing bullishly back through its signal line. Relative Strength is also in an uptrend vs the SP500 and has been this way since the middle of 2014. Prior to this most recent 18-month outperformance, the Dollar has been in a Relative downtrend vs stocks since 2009. It appears a major shift is taking place.