Dollar is King

My last post back in December, in hindsight, seems to have to had a very appropriate title "Dollar bulls Beware". The Dollar index was hovering around 80 and went to make a low around 72 in May. I only wish that I had taken my own advice and stayed short the dollar the entire period :-).

I'm ready to turn a Dollar bull now. I'm no fundamental expert. But based on what I can read on financial editorials, even though QE2 is about to be done Dollar's continued weakness is based on the expectations of a QE3. Read this post for an in depth treatise on "To QE3 or Not to QE3". I don't know if QE3 would occur or not. The only leading indicator I have to look at is PRICE. Can I look at the price action and determine if there are indications of an emerging bullish trend in the dollar? I believe so. See the chart below.

There is no doubt the long term trend is DOWN. But on a shorter term, there seems to be an emerging upward trend. The Dollar Index posted a Higher High on a weekly scale. In Elliott wave terms I can count that as an 1-2 sequence. It could also be an A-B sequence and at best we may have a rally to C and then the downtrend could continue.


After a 5 wave rally from Mar 2008, the Dollar index has slid in 3 waves W-X-Y to a possible double bottom. Wave |W| = Wave |Y| in price and Wave |Y| has taken twice the time to form compared to Wave |W|. Wave |Y| has three sub waves (a), (b), (c) where wave (c) = 61.8% of wave (a). The whole correction from Mar 2009 high to May 2011 is 88.6% of the rally from Mar 2008 to Mar 2009. Long story short, there is a strong confluence of Fibonacci support around 73 for the Dollar index.

I am a Dollar bull until I see the price action forces a change in my perspective. I will post again if my bias changes and hopefully it's longer than another 6 months and I can follow my advice during that period :)

Few other charts to demonstrate reasons for my Dollar bullishness at least in the short term. Commodities Silver and Oil seem to be in a corrective B wave and are possibly heading lower.

A post on Dollar strength would not be complete without a chart showing the possibility of EURO weakness. EURO seems to be in a complex multi-year correction and may have just completed a X wave.

Dollar bulls beware

The monthly chart below of USDCHF is ominous. Any dollar bull out there needs to have close look at that chart. In simple technical analysis terms, a long term triangle was broken decisively followed by a retest of the broken triangle and then a continuation. That's text book price action for a triangle break.


In Elliott wave terms the long term triangle seems to be a wave 4 at a larger degree. Wave 5 is under way and seems to have completed wave (1) of 5. The tricky question is whether wave (2) of 5 is complete? The chart below offers hope to the dollar bulls for an extended wave (2) of 5. Price action in the next couple of weeks should clarify whether wave (2) is complete or not.

For now there's no reason to be a dollar bull.

PS: I'm short 2 units of USDCHF from 0.9905.

What's up with EURO?

Here's a look at the EURO Index chart. The index seems to have completed an ABC correction from 123.75 high to 102.13 low with a wave A = wave C extension. From the 102.13 low posted in June this year, the index has moved up in 3 waves which could easily be a 3 wave correction before further down side below the summer low. There's extreme bearish sentiment in EURO right now owing to the problems in Greece and Ireland and potential problems with Belgium and Spain. The market might be blind sided to the bearish view that any positive news coming out of the EURO zone can spark a sharp rally. In the big picture, there's a possibility that the ABC correction that ended this summer might have been a large wave 4 with a potential for a multi-month wave 5 rally.
What possible fundamental factors could drive a wave 5 rally?
1) Market has already factored in majority of the bad news coming out of the EURO zone.
2) The problems with USD (all the QE) might be much larger compared to the woes of EURO
3) Strategic balancing of foreign currency reserves by China by shifting partially from USD to EURO

On the contrary, It's possible EURO can go south badly from here if what we know is just tip of the iceberg and the potential problems with Spain and other constituents of EURO are much larger than initially thought of.

Right now I'm favoring a rally in the EURO. It will change if the 102 level in the index is broken.

EURCAD - Update

I got stopped out of the EURCAD trade last week. And sure as it often happens the pair reversed course and went in the direction that I had in my mind when I initiated the trade. The wave 2 correction was just too deep to my liking. I believe that this is just the start of wave 5 and I will get an opportunity to go short again (hopefully without getting stopped out this time). The daily count seems to indicate that we might have completed a 1-2 sequence and have a started a wave 3. I expect another 1-2 sequence in wave 3. The 4 hour chart seems to indicate that the pair has completed or is close to completing a 5 wave sequence from 1.4330. Any 3 wave rally would be an opportunity to sell. As posted last week I believe that the pair might have completed a wave 4. The back to back bearish candles right at the 50% retracement of wave 3 seems to confirm that opinion.

EURCAD Trade initiated

I went short EURCAD at 1.4150 against a 1.4250 stop.
The pair might have possibly completed a wave 2 of 3 or C in a flat correction.

The longer term chart seems to indicate that the pair might have completed a wave 4 of the downtrend that started last year. Wave 4 seems to be in 3 waves where wave A=C. The bearish engulfing candle right at the 50% retracement of wave 3 seems to indicate that wave 4 might be complete. Given that the wave 2 was shallow (only 38.2% retracement of wave 1) a deeper wave 4 retracement was expected in line with the alternating principle. A follow through this week to the bearish engulfing candle from last week would probably confirm the completion of wave 4.

USD/CHF - Is Wave 4 complete?

USDCHF seems to have completed a 3 wave correction at a minor degree. It's possible that the wave 4 correction of the move down from 1.17 is complete and the price could take out previous swing lows to complete wave 5. However, given that wave 2 was very shallow we might see a much deeper wave 4 correction. The correction that seems to have completed may just be the first wave of a 3 wave correction. It's possible that this could evolve into a triangle wave 4 correction or some other complex form of consolidation before another leg down to complete wave 5.
I was hoping for the current move to go up to 1.0050 to go short as posted last week. I would now look for a pullback to go short.

Gold - A case for both bull and bear

Both bulls and bears can make a case based on recent price action in gold.

Bearish scenario: The previous swing high (around 1390) was a major top (wave 5) and price has just completed a minor degree 1,2 sequence. The other scenario is that the previous swing high was a wave 3 and price has completed a A, B sequence of a zigzag correction of wave 4 and the C leg could take the price to around 1280.

Bullish scenario: The price has just complete a wave 4 flat correction and has completed a 1,2 sequence of wave 5.

There are other possible scenarios like a triangle wave 4. I will stick to these scenarios for now until price action indicates otherwise.