Over the summer, it’s been a nice run for the US Dollar. Last week, I noticed two mainstream commentators in particular calling for further dollar strength – one was a Bubblevision reporter, saying, “It’s not too late” to buy dollars (King Dollar Rules) , and the other a popular newsletter writer saying the USD was at the “beginning” of a bull market. After a 12-week rally, there’s clearly some confusion on the meaning of the word “beginning.” Let’s take a look at the charts to give us some Context.
Focus Chart: USD Index
It’s clear that the US dollar has broken out after pushing above its 2011, 2012 and 2013 highs over the past couple of weeks. And, there might be some further follow through to the upside early next week, but I’d bet against the US Dollar Index closing out the week with another gain. Yes, from a longer term perspective, there is room to run to the upside, but a couple of wave four pullbacks will likely mean that the US Dollar will have very little to show before the wave (iv) bottom strikes. We remain longer term bulls, but we are bullish on pullbacks not into rallies.
Elliott waves teach us that markets ebb and flow. Sometimes, in runaway bull markets (like 2013 in stocks or USD/JPY) Elliott can be a bit of a disservice, leaving analysts looking for pullbacks that never come. There’s a good lesson here: “Take what the market gives.” In my mind, I’m ok with missing parts of markets that don’t show clear Elliott waves, because Elliott is my main market tool. For others, missing a giant move in a market may not be acceptable; especially breakout traders, that are ok with giving away a decent gain when a market breaks out and then retraces. This is where your trading plan comes into play. Know your style, and then be patient with that style. For me, buying a market after 12 up weeks in a row seems silly – I’ll wait for the pullback, because one will materialize.
Prices found support on Tuesday, but were unable to hold those gains after the ECB decision on Thursday. A sharp rally is due, especially now that prices are near where wave (iii) will be 2.618 times the length of wave (i), a common relationship in extended third waves. We like the idea of an early week bottom to be followed by late week strength into the confluence of resistance in the 1.2700 area.
Last week we wrote, “One currency that is not due for a bounce is GBP. The three step rally for wave .iv, that failed at resistance, means that the larger count is lower.” And, this week GBPUSD closed lower five days in a row. We are nearing the 2.618 relationship between waves iii and i in this pair too, so the early week decline followed by late week strength is favored here too.
The “dollar rally is just beginning” comment is particularly amusing when it comes to USDJPY. Last week we wrote, “The targets above include the 100% expansion target of the largest point of wave ((4)), the point where the current rally would be 2.618 times the length of wave 1, and the 2008 high which comes in at 110.65 (structural resistance).” And, this week we tagged the expansion target exactly. Notice how prices found support at the 20-day moving average and reversed higher, and the fact that last week’s low was below that of the prior week. That fact, likely means that a one degree larger fourth wave bottom was struck. In addition, the bearish divergence into last week’s high suggests that a final push up towards 110.62 may be terminal. Certainly, we’re not going to be selling a new high directly, but we will pay attention to any bearish reversals.
The pullback to 1.1100 was brief, but we did get it. Now, notice how prices pushed to a new high here, where they didn’t in USDJPY. This suggests that there is further bullish potential for the dollar versus CAD, as opposed to JPY. That being said, we’re at resistance here, and we’ll be looking to buy another pullback. What we may see here is a breakout and then a retest of the breakout level. Notice how clearly the decline from the wave 3 high from March is a clearly corrective three-wave move in hindsight. Elliott waves are a thing of beauty when they work, which is why it is the Wolf’s main market tool, despite the flaw we discussed above.
Resistance from the 2013 highs are within sight now, as is the 2.618 expansion target of wave i. Friday saw a push above the down trendline drawn off of the 2012 and 2013 highs, so a top into resistance followed by a retest of the broken trendline from above is a nice roadmap. Notice that wave (ii) and ii were both of the “sharp” variety, so that means wave iv and (iv) should be of the “flat” family per the guideline of alternation. Corrections should move sideways and correct more via time than price.
Confirmation of the bearish count was seen this week as prices took out the January low. Former support is now resistance, and a bounce should be seen as a bearish opportunity. Here too, a wave four bounce will yield a wave (v) decline, maybe starting sometime late in the coming week, or early the following.
A bigger bounce and a smaller decline left NZDUSD above the low set early in the week in contrast with AUDUSD. NZDUSD may be the pair to play for USD weakness based on the fact that prices are near support, and the fact that we are close to being able to count five waves down from the high. But, keep this in mind, RSI is now in “sustainable bear” territory, which implies that even the larger bounce should be corrective.
Until next time, Happy Trading.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.