US Dollar Index ( DX ) 24 Aug 10

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 74.170 had ended at 88.708 and that a decline to the 79.740 area was now possible. The DX Index fell from that 88.708 high to an 80.085 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 70.700 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 7. 5. 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 88.708 low of 11 June 2010. Page 8 6. As noted at the time in our daily and weekly reports, the rebound from the 80.085 low clearly triggered technical buy signals. See pages 9 to 13. 7. The big question is whether the longer term up trend resumed from that 80.085 low. A decisive close above 86.865 would confirm the bullish case for the resumption of the long term up trend. Page 14 8. Such a close would be further confirmation of our long held bullish outlook for the Greenback. See the reprints on pages 15 to 17. 9. 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 23. 10. 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- -1- -2- 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 US Dollar Index - 24 Aug 10 line on monthly close - log scale - WTI versus the DX Index ( US Dollar )

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 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

Plaza Accord Sept 1985 164.72 5 US Dollar Index (DX) REPRINT Long Term Wave Count - Bullish Case The.618 x A = C target was 67.544 The.618 x A = C target was 67.521 Long Term Support? The big question is still whether the 70.70 low was as close as the DX Index is going to get to the 68.00 area long term support. Long Term Resistance The 128.80 area marks the.618 retracement of the entire 164.72 to 70.70 decline. Intermediate Term Resistance The 101.80 is the.618 of 121.02 to 70.70 Near Term Resistance The 93.80 is the.236 of the entire 164.72 to 70.70 decline B 121.02 120.90 106.56 97.32 97.10 B 92.63 85.33 89.62 80.34 78.19 A 80.05 80.39 A 70.70 C of C

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.

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 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 101.00 area. Note from page 4 that 101.80 is the.618 retracement of the 121.02 to 70.70 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.

US Dollar Index - 03 Dec 09 9 REPRINT Dollar Index ( DX ) - daily chart and 14 day RSI 75.827 Bullish RSI Divergence 74.940 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- 74.170 tom of an old and tired bear. And this certainly does not match the widespread expectations of an imminent collapse in the US Dollar. 29.67% 31.92% 35.94%

US Dollar Index - 10 June 10 10 REPRINT Dollar Index ( DX ) - daily chart 88.708 Bearish RSI Divergence Sell Signal One of the warning signs for the bulls is the bearish and 14 day RSI 87.458 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 88.708 high. See page 13. 81.78% 73.24%

11 US Dollar Index - 24 Aug 10 88.708 Dollar Index ( DX ) - daily chart 87.458 and 14 day RSI Bullish RSI Divergence Buy Signal It was subtle and easily overlooked but nevertheless entirely valid. The lower low at 80.085 was accompanied by an RSI divergence buy signal. 81.78% 73.24% 80.469 80.085 22.62% 24.58%

12 US Dollar Index - 24 Aug 10 74% Bulls 74% Bulls 87.458 88.708 Dollar Index ( DX ) - daily chart and 14 day RSI Sentiment Divergence Buy Signal Note that the new low at 80.085 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 88.708 was not accompanied by a higher percent bullish. This failure signalled an exhaustion of the bullish enthusiasm and thereby gave a sell signal. 81.78% 73.24% 80.469 46% Bulls 80.085 48% Bulls 22.62% 24.58%

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 82.265 level is broken. The chart on the next page underlines why this near term pattern is so very bullish.

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 80.085 as only a minor bear market correction in a continuing decline? Peg 85.420 ideal resistance for the bears. A decisive close above the 86.865 level pretty much extinguishes any case for Greenback bears. ( III ) 81.342 ( V ) of -I- 82.240 -III- 87.458 -V- of <I> 88.708 86.304 -IV- ( I ) 78.449 79.507 ( IV ) 80.031 -II- 80.085 <II>? 76.601 ( II ) 74.170 II

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 89.920-91.935 zone. Such an up side break out would then have the 102.00 area as the minimum implied upside target. And that would align with the head and shoulders bottom target from page 7.

DX Index - 10 Jun 10 16 REPRINT Dollar Index ( DX ) - daily chart - log scale Wave Count In this model a bull market correction of the entire 74.170 to 88.708 advance is now due. The.618 retracement at the 79.730 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 77.280 80.031 -II- -III- 87.458 -V- of <I> 88.708 86.304 -IV- ( III ) 81.342 ( V ) of -I- 82.240 ( I ) 78.449 79.507 ( IV ) 76.601 ( II ) 74.170 II

DX Index - 10 Jun 10 17 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 92.000-93.000 zone ( see page 9 ). B 121.020 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 93.000 area is decisively exceeded. From this chart the minimum implied longer term target on a decisive break above 91.935-92.900 would be the 103.00-106.000 area. <B> 92.630 88.463 <A> 80.390 <A> 70.698 <C> of A 74.170 <B>

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 81.50 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? 6 6 3 Bullish Tower Bottom

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

US Dollar Index - 08 Jan 09 Dollar Index ( DX ) - monthly chart Sentiment History Sentiment data is from the Bullish Consensus of Market Vane at www.marketvane.net 59% Bulls 02/08/94 96.56 high 88% Bulls 08/17/98 102.88 high 8% Bulls 10/08/98 90.57 low 20 82% Bulls 07/06/01 121.02 high REPRINT Financial Trends are Emotional Trends 60% Bulls 11/16/05 92.63 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 84.023 high 11% Bulls 04/19/95 80.05 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 - 57.6& Japanese Yen - 13.6 % British Pound - 11.9 % Canadian Dollar - 9.1% Swedish Krona - 4.2% Swiss Franc - 3.6 % 20% Bulls 12/31/04 80.39 low 16% Bulls 03/17/08 70.698

US Dollar Index - 10 Jun 10 Dollar Index ( DX ) - weekly chart - - log scale - 81% Bulls 11/21/08 88.463 21 REPRINT 74% Bulls A Crowded Trade? 03/04/09 89.624 When we first became wildly bullish on the 75% Bulls US Dollar back in March 2008 many undoubted into the 88.708 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 77.688 Sentiment History Sentiment data is from the Bullish Consensus of Market Vane at www.marketvane.net 34% Bulls 11/26/09 74.170 16% Bulls 03/17/08 70.698

US Dollar Index - 10 Jun 10 22 Dollar Index ( DX ) - daily chart - log scale REPRINT 74% Bulls 06/07/10 88.708 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 88.708 from 7th June failed to create a higher percent bullish compared to the preceding lower high at 87.388 from 26th May. 74% Bulls 05/26/10 87.388 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 US Dollar Index - 24 Aug 10 74% Bulls 74% Bulls 87.458 88.708 Dollar Index ( DX ) - daily chart and 14 day RSI Sentiment Divergence Buy Signal Note that the new low at 80.085 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 88.708 was not accompanied by a higher percent bullish. This failure signalled an exhaustion of the bullish enthusiasm and thereby gave a sell signal. 81.78% 73.24% 80.469 46% Bulls 80.085 48% Bulls 22.62% 24.58%

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

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.