In an article I wrote in March on silver, I suggested a major dollar rally was imminent. As it turned out, the dollar rally had begun at the end of 2004, but it took until the summer for the move to exceed previous rally sizes and thus confirm its status.

Now in September, we have the dollar at another interesting juncture. Since 2001, the US Dollar Index traced out an Elliott impulse wave until December of 2004. The chart below shows that major bear move as well as the 65 week moving average or long term market changes. A three and half year down move shaved nearly a third off the dollar's value compared to a basket of major currencies. That move has completed as it hit the multi-decade support at the 80 level. Naturally, such a strong support line may suggest the bear is over, but as stated before, I do not believe the dollar bear market is over by a long way.

The second article I wrote on the 4th June entitled "The Curious Case of the Dollar Rally" suggested an initial rally of the 2001-2004 bear up to 91 based on a study of other smaller rallies during the dollar plunge. Four weeks after that article, the dollar topped out at 90.77 and has been on a downturn since then. So far, this drop has hit a low of 86, but how much further can it go? The chart below shows the progress of our dollar rally.

As before, I stay with my WXYcorrection pattern with the only surprise being the length the final leg took from late April until early July. A WXY corrective pattern is a rarer form than the normal ABC zigzag or flat corrections, but is nevertheless valid. However, can one say that this 6-month correction is over and the dollar bear market is about to embark on its next and possibly most damaging leg down?

On the one hand, "yes" is a reasonable answer. After all, the rally has retraced to the predicted 91 mark, it is a complete corrective pattern in and of itself and it has run longer than smaller degree rallies. All seems done and dusted, so can we now go short the dollar and long gold and silver?

Well, I have some observations that make me wonder if we are not yet over the correction. Firstly, the 6 months elapsed still doesn't look long enough for a higher degree correction. Six months constitutes 14% of the time of the prior 42-month bear down leg. Statistical studies of Elliott wave patterns suggest that nearer 30% is a better figure. That would mean the current two-month down move is only the midpoint of our overall correction to be followed by one more rally before the big plunge.

Secondly, if the rally from December did end at 90.77 in July, we would expect to see a five-part impulse wave begin the new bear leg. The numbers (1) to (5) in the chart marks this proposed impulse wave. It looks neat enough at a superficial level, but one of the classical rules of Elliott Wave Theory stipulates that wave 4 should not infringe on the price territory of wave 2. This it has done as shown by the horizontal line joining (2) and (4) - note that wave (4) has crossed over than line. I would also add that wave (3) doesn't look like a wave 3 to me either. So, it looks overall that we have finished wave A and are now somewhere in wave B before moving back up to the 91 level some months from now in a wave C.

I could be wrong, but chart interpretations are all about probabilities and the probability slightly favours a continued rally into early 2006. What would disprove this interpretation? Quite simply, we need to see a significant breach of the old low of 80.39 hit in late December (see chart). Until that point is reached, I am personally cautious but, as ever, a long-term bull on gold and silver!

Roland Watson writes the investment newsletter The New Era Investor that can be purchased for an annual subscription of $99. In issue 7 out next week, it is noted that only 1% of the capital markets is now tied up in gold, but what was the percentage in 1980 when gold was riding high and how does that reflect on the future price of gold when another 1980-type crisis hits? Read issue 7 to find out.

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Comments are invited by emailing the author at newerainvestor@yahoo.co.uk