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US Dollar Update

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 12th, 2007.

Morning all, I have looked at the USD and there are many uncertainties about how things unfold. There are some clues presented that suggest the new course the USD is likely to ensue over the course of the next 2 years. The dollar failing to have any resistance on the path below 80 required acceptance that the USD was going below 80. If a triangle is still forming, it is going to have a descending angle to it, which poses very bearish upon its resolution (still mid to late 2009).

Numerous Fibonacci time extensions of various waves are shown on the chart, with dates clustering around early November and various dates in December. The USD can be expected to show weakness for at least 2-3 more months as best that I can determine. The lower Bollinger bands are in a setup for a continuation of the decline and as of this AM, the USD passed through the lower 55 MA BB. Short-term stochastics have the %K beneath the %D, with no sign of a crossover. The extreme weakness in the dollar will become more evident by time Figure 4 is presented, for those in doubt (not that there is likely to be any).

Figure 1

Red lines on the right hand side represent Fibonacci price projections of the downward trending price action of various waves projected off their subsequent partial retracements. Areas of line overlap form Fib clusters, which indicate important support/resistance levels. A Babson channel was drawn to illustrate the channeling action of the USD from October 2006 to present. The 79.42 Fib level was taken out, strongly suggestive the USD is going to go back down to long term support around 77. There is a Fib level at 77.9 and another just above 77.0. The angle of descent is shown if Figure 4 and must occur if the labeling scheme presented is accurate. Full term stochastics have the %K beneath the %D, with no signs of a crossover. The %K has at least 6-8 weeks of downside, but is likely to be extended further. The fashion the dollar has been channeling suggests a rapid decline to the 76-77 area at present and must occur before the end of March 2008. Should the bottom not be in by the end of March 2008, then the Elliott Wave count presented for wave [B] (a flat (3-3-5) would become a double combination.

Figure 2

The long-term Elliott Wave chart of the USD index is shown below, with Fibonacci time extensions of the initial decline shown at the top of the chart and Fib price projections of the decline projected off the April 2006 termination point. The next Fib support on the weekly chart is 74.6, so if the 76-77 area gives out, the USD is in new territory and this will represent the next natural level of support (the next level is at 70). The implications for the dollar bottoming no later than March 2008 are more important on the weekly chart than the daily charts. The chart is presented in log format because the confirmed weakness in the dollar dictates a longer-term range is shown to cover all possibilities. To break out of the channel, the USD is required to complete wave [B] by the end of March 2008. If it fails to significantly rebound in a wave [C], then the triangle scenario will likely become invalidated and the USD has a trip to the lower line of the channel (which is around 65-70). Full stochastics have the %K beneath the %D, with no sign of a crossover or internal strength. The triangle shown (red trend lines with the thought path denoted in green) represents the best case scenario for the dollar over the course of the next 2 years. This non-limiting triangle will have reverse alternation between waves [B] and [D]. Let's hope the triangle structure holds and the angle of the apex does not tip lower. The long-term target for the USD around 2011/2012 is likely to be somewhere between 50 and 60.

Figure 3

The long-term Elliott Wave chart of the USD index is shown below, with the thought pattern denoted in green. For this count to be accurate, the USD must complete the pattern shown below between the 76-77 area no later than March 2008, in a choppy type of fashion presented below. Wave (C ) is labeled as a terminal impulse (3-3-3-3-3 internal structure) and the 2-4 trend line MUST be broken after completion of wave 5, something that has not yet occurred. If the USD makes a moon shot for 76-77 over the course of the next month with no resistance, then the count I have will require tweaking.

Figure 4

Bernanke was in Europe trying to get the EU to lower interest rates in desperation to try and find some support for the dollar. At some point, there will be buyers of US real estate from Europe and other countries, which will help to stabilize the US dollar. One other count possible for wave [B] is that the initial portion is A-B-C.(W), terminating where 1 is located. Point 2 becomes wave (X) and the move at present is wave (Y). I hope that the count and alternative counts presented make sense. Wave counts are governed by rules in pattern, time, complexity and wave structure. Failure of one of these components will require the labeling scheme to be altered to fit the data.

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