US Dollar Index ( DX ) 24 Aug 10

Transcription

1 1 US Dollar Index ( DX ) 24 Aug 10 Review Impulsive Wave Degree Correctiv e Our last special report on the DX index, dated 10th June, suggested that the advance from had ended at and that a decline to the area was now possible. The DX Index fell from that high to an low on 6th August, and has ricocheted higher from there. "I" I "II" II Grand Supercycle Supercycl e "A" A "B" B Top Ten Main Points 1. We do not cover the US Dollar because it is the world s reserve currency. We cover it because trends in the Greenback have a powerful and immediate effect on both US equities and worldwide commodities. 2. The charts on pages 2, 3, and 4 highlight the inverse relationship between the US Dollar and crude oil prices, commodities in general, and US equities, respectively. 3. Our long term wave count had pegged the low of March 2008 as the start of a long term up trend where our eventual target is parity with the Euro-fx. See page 5 4. Aside from the obvious utility of a detailed Elliott wave analysis, classical chart pattern analysis has also been extremely useful over the years. See pages 6 and Classical chart pattern analysis now shows evidence of a big head and shoulders bottom pattern that targets parity with the Euro-fx on a decisive break out above the low of 11 June Page 8 6. As noted at the time in our daily and weekly reports, the rebound from the low clearly triggered technical buy signals. See pages 9 to The big question is whether the longer term up trend resumed from that low. A decisive close above would confirm the bullish case for the resumption of the long term up trend. Page Such a close would be further confirmation of our long held bullish outlook for the Greenback. See the reprints on pages 15 to Over the years sentiment readings have been extremely useful in confirming peaking and bottoming patterns. The latest signal from market sentiment is a buy signal. See pages 19 to A major move up in the US Dollar from here would be clearly bearish for energy, for commodities, for US equities, and of course for the Euro-fx. See pages 2 to 4 and also page 25. <I> <II> Cycle <A> <B> ( I) (II) I ntermediat e (A) (B) " 1" "2" M ino r "a" "b" 1 2 Minut e -I- -II- Primar y -A- -B Minuett e -a- -b- ( 1) (2) S ub-minuett e (a) (b) [ 1] [2] M icr o [a] [b] The market recommendations contained in this letter represent the opinions of the author. Such opinions are subject to change without notice. Principals and employees of may or may not trade in the commodities discussed in this letter, taking positions similar or opposite to the positions discussed herein. The information contained in this letter is taken from sources we believe to be reliable, but it is not guaranteed by us as to the accuracy or completeness thereof and is sent to you for information purposes only.commodity trading involves risk and is not for everyone. a b

2 2 US Dollar Index - 24 Aug 10 line on monthly close - log scale - WTI versus the DX Index ( US Dollar )

3 3 US Dollar Index - 23 Aug 10 line on daily close - log scale - Goldman Sachs Commodity Index versus the DX Index ( US Dollar ) GCSI The DX Index

4 4 US Dollar Index - 24 Aug 10 line on monthly close - log scale - Dow Jones Industrial Average versus the DX Index ( US Dollar ) Dow Indusrial Average While these two markets sometimes trend together, as from November 2009 to March 2010, those periods have historically been the exception rather than the rule. DX Index

5 Plaza Accord Sept US Dollar Index (DX) REPRINT Long Term Wave Count - Bullish Case The.618 x A = C target was The.618 x A = C target was Long Term Support? The big question is still whether the low was as close as the DX Index is going to get to the area long term support. Long Term Resistance The area marks the.618 retracement of the entire to decline. Intermediate Term Resistance The is the.618 of to Near Term Resistance The is the.236 of the entire to decline B B A A C of C

6 US Dollar Index - as of Friday 04 Dec 09 6 REPRINT US Dollar - Daily Chart - as of 04 Dec 09 You may remember that we included this exact chart with the daily report for Monday 7th December. We did not want any clients being short the US Dollar anyway, anyhow. And we were hoping that this dramatic chart would drive home our point. First the US Dollar held our critical long term wave count support on bullish RSI divergence. Then it broken decisively up from a long standing bullish rising wedge. And it did so from a historical ( histerical ) extreme of bearish sentiment. It was clear that the only position to have in the Us Dollar was a long position. See next page for the update.

7 US Dollar Index - as of Thursday 10 June 10 7 REPRINT US Dollar Index ( DX ) - daily Chart - log scale - as of 10 Jun 10 The moral of this story is to never ever be short a market that has broken up from a long standing falling wedge pattern. The further elaboration of this lesson is to never be short a market that breaks up out a falling wedge pattern after holding pivotal support and generating a momentum divergence buy signal from a bearish sentiment extreme. However the purpose of this report is not to pat ourselves on the back. The purpose of this report is to ask the price action where the US Dollar is headed from here.

8 8 US Dollar Index - 26 Aug 10 US Dollar Index - monthly log scale chart Head and Shoulders Bottom Target The head and shoulders target is the area. Note from page 4 that is the.618 retracement of the to decline. Us Dollar - Head and Shoulders Bottom? In a 16 August special report we focused on the Epidemic of Head and Shoulder Tops. All the major stock market indices and all the major commodities showed evidence of this peaking pattern. Both equities and commoditiestrend inversely to the US Dollar. So if there is evidence of big head and shoulder top patterns in these other markets then there should be evidence of a big head and shoulders bottom in the US Dollar. As theis chart attests, there is indeed such evidence.

9 US Dollar Index - 03 Dec 09 9 REPRINT Dollar Index ( DX ) - daily chart and 14 day RSI Bullish RSI Divergence New lows in price with higher lows in the RSI equals bullish RSI divergence. The waning downside momentum evidenced by this chart is clearly the symp tom of an old and tired bear. And this certainly does not match the widespread expectations of an imminent collapse in the US Dollar % 31.92% 35.94%

10 US Dollar Index - 10 June REPRINT Dollar Index ( DX ) - daily chart Bearish RSI Divergence Sell Signal One of the warning signs for the bulls is the bearish and 14 day RSI RSI divergence highlighted here. For bulls new highs in price without new highs in the RSI is never a great news. The only caveat is that, in a subdividing third wave extending rally, the most overbought condition is typically reached at the peak of wave -III- of <III>. Coincidentally enough that is the most bullish case label for the high. See page % 73.24%

11 11 US Dollar Index - 24 Aug Dollar Index ( DX ) - daily chart and 14 day RSI Bullish RSI Divergence Buy Signal It was subtle and easily overlooked but nevertheless entirely valid. The lower low at was accompanied by an RSI divergence buy signal % 73.24% % 24.58%

12 12 US Dollar Index - 24 Aug 10 74% Bulls 74% Bulls Dollar Index ( DX ) - daily chart and 14 day RSI Sentiment Divergence Buy Signal Note that the new low at was accompanied by a higher percent bullish. This signalled an exhaustion of the Sentiment Divergence Sell Signal bearish enthusiasm - a sell signal. Note that the new high at was not accompanied by a higher percent bullish. This failure signalled an exhaustion of the bullish enthusiasm and thereby gave a sell signal % 73.24% % Bulls % Bulls 22.62% 24.58%

13 13 US Dollar Index - 24 Aug 10 Dollar Index ( DX ) - 300m log scale chart Most Recent Price Action That one can so effortlessly construct such an extremely bullish wave count, as is depicted here, does not prove that it is correct. But the flip side is that it is extremely difficult to find a bearish pattern here, especially if the up trend resumes before the level is broken. The chart on the next page underlines why this near term pattern is so very bullish.

14 14 US Dollar Index - 24 Aug 10 Dollar Index ( DX ) - daily log scale chart Key Resistance What do the bears need to maintain the case for the rebound from as only a minor bear market correction in a continuing decline? Peg ideal resistance for the bears. A decisive close above the level pretty much extinguishes any case for Greenback bears. ( III ) ( V ) of -I III V- of <I> IV- ( I ) ( IV ) II <II>? ( II ) II

15 15 US Dollar Index - 24 Aug 10 Dollar Index ( DX ) - monthly log scale chart Big Picture - Bullish Case Is this extremely bullish interpretation of the price action so far really justified? Perhaps not yet. However it will be the only wave count interpretation should the rally from here break decisive above the zone. Such an up side break out would then have the area as the minimum implied upside target. And that would align with the head and shoulders bottom target from page 7.

16 DX Index - 10 Jun REPRINT Dollar Index ( DX ) - daily chart - log scale Wave Count In this model a bull market correction of the entire to advance is now due. The.618 retracement at the area would not be an unexpected target from here. The closing basis must hold must now be considered as the.7862 retracement way down at II- -III V- of <I> IV- ( III ) ( V ) of -I ( I ) ( IV ) ( II ) II

17 DX Index - 10 Jun REPRINT Dollar Index ( DX ) - monthly chart - log scale Most Bullish Case Target? Here we update the long term wave count from page 4. Since this move broke above the bullish falling wedge resistance line back on 4th Dec 2009 ( see page 5 ) our upside target has been the zone ( see page 9 ). B It is not too early to enquire where the US Dollar might rally if the most bullish wave count on page 13 is correct and the area is decisively exceeded. From this chart the minimum implied longer term target on a decisive break above would be the area. <B> <A> <A> <C> of A <B>

18 18 US Dollar Index - 24 Aug 10 Daily Chart Is today s candle a bearish doji top or a neutral spinning top? In other words will the DX correct by merely congesting or by actually retreating? Bears need a decisive decline for the 25th. Weekly Chart Is this week a potential doji star top? It is way too early to tell. It is only Tuesday and bears need a shrp confirming drop next week. Meanwhile there is still the massive tower bottom. Monthly Chart Four trading days still remain. Yet even a retreat to the area by 31st August would still leave a potential doji star bottom on the monthly chart. Give the advantage to the bulls. Possible Doji Top?? Doji Star Top? Bullish Hammer Bottom? Bullish Tower Bottom

19 19 US Dollar Index Appendix -I- - US Dollar Sentiment History - Market Vane Bullish Consensus

20 US Dollar Index - 08 Jan 09 Dollar Index ( DX ) - monthly chart Sentiment History Sentiment data is from the Bullish Consensus of Market Vane at 59% Bulls 02/08/ high 88% Bulls 08/17/ high 8% Bulls 10/08/ low 20 82% Bulls 07/06/ high REPRINT Financial Trends are Emotional Trends 60% Bulls 11/16/ high Trends in currency valuation are not driven by economic or financial news. The news always arrives after the fact to explain the price move that already occurred. Currency trends are driven by the collective mood of the market. Up trends only end once all are bullish, long, and the best case has been discounted. Down trends only end once all are bearish, all are short, and the worst case scenario has already been discounted. 81% Bulls at the high 11% Bulls 04/19/ low U.S. Dollar Index - DX The US Dollar Index ( DX ) is a trade weighted geometric average of six currencies. The currencies and their trade weights: Euro & Japanese Yen % British Pound % Canadian Dollar - 9.1% Swedish Krona - 4.2% Swiss Franc % 20% Bulls 12/31/ low 16% Bulls 03/17/

21 US Dollar Index - 10 Jun 10 Dollar Index ( DX ) - weekly chart - - log scale - 81% Bulls 11/21/ REPRINT 74% Bulls A Crowded Trade? 03/04/ When we first became wildly bullish on the 75% Bulls US Dollar back in March 2008 many undoubted into the thought we had worked late one too many nights and had finally baked our brains. And it was also very unpopular to be bullish on the Dollar from our 4th Dec 09 long term buy signal. However with bearish sentiment divergence having just been reached into an extreme of 75% bullish ( see next page ), being long the Greenback has definitely become a crowded trade. 52% Bulls at the Sentiment History Sentiment data is from the Bullish Consensus of Market Vane at 34% Bulls 11/26/ % Bulls 03/17/

22 US Dollar Index - 10 Jun Dollar Index ( DX ) - daily chart - log scale REPRINT 74% Bulls 06/07/ Bearish Sentiment Divergence Bearish sentiment divergence occurs when the price makes a new high in the up trend from an overbought condition ( see page 15 ) but the sentiment reading fails to record a new, higher percent bullish. In this instance the new high at from 7th June failed to create a higher percent bullish compared to the preceding lower high at from 26th May. 74% Bulls 05/26/ The question at hand is whether this is an outright sell signal or only an indication that a third of a third momentum and sentiment extreme may have been reached. See the page 15 discussion on this point.

23 23 US Dollar Index - 24 Aug 10 74% Bulls 74% Bulls Dollar Index ( DX ) - daily chart and 14 day RSI Sentiment Divergence Buy Signal Note that the new low at was accompanied by a higher percent bullish. This signalled an exhaustion of the Sentiment Divergence Sell Signal bearish enthusiasm - a sell signal. Note that the new high at was not accompanied by a higher percent bullish. This failure signalled an exhaustion of the bullish enthusiasm and thereby gave a sell signal % 73.24% % Bulls % Bulls 22.62% 24.58%

24 24 US Dollar Index Appendix -II- The DX Index as a Short Euro-fx

25 25 US Dollar Index - 24 Aug 10 line on monthly close - log scale chart The Inverse Relationship Is there a more perfect inverse relationship anywhere is any markets? I do not think so. This chart reminds me of photos of a still mountain lake, with the mountains image perfectly reflected on the lake surface.