A Quick Update on the US Dollar Index

Feb 13, 2009: 11:45 AM CST

Seems like this week I spent a good deal of time discussing Gold and Crude Oil this week, so let’s look at a related market that normally trades inverse these commodities – The US Dollar Index.  It might give us clues as for what to expect in these markets.

US Dollar Index Daily:

US Dollar Index

I wish the Dollar chart was showing more clarity, but like all other markets including the S&P 500 (US Equity Indexes), it seems to be poised in a tight consolidation (perhaps even ascending triangle) where we’ll know soon enough in which direction it will break, but it’s still better to wait for the actual break (above resistance or below EMA support) before ‘guessing.’

Structurally, we’ve completed a 5-wave Impulse to the upside (seems the 5th wave was the longest), all of which is likely part of a larger fractal that is resolving in a sideways (or triangle) correction.

I see an ascending triangle (traditionally bullish) pattern forming above confluence EMA (20 and 50) support which lends us to believe a bullish break could be in order, but there is also a negative divergence forming under price.  Reference what happened in November the last time we saw such a pattern form – it led to a correction downwards.

There’s widespread belief that the Economic Stimulus Plan will create downward pressure on the Dollar but that hasn’t been seen just yet.

Officially – and until proven otherwise – the Daily chart is in a confirmed uptrend, as evidenced by higher highs & higher lows (see the 5-wave count) and also price is above all three key moving averages, and they are in the ‘most bullish orientation possible.’  Bears need to watch out for those structural realities at the moment.

What are the short-term implications?

If the Dollar Falls (breaks support), it will likely cause a rally in Crude Oil and other commodities perhaps including gold (which is challenging resistance).  For a deeper discussion on whether or not Gold will trade with or inverse the dollar, Mish (Mish’s Global Economic Trend Analysis) has a great article worth reading entitled “You Can’t Fool Gold.”

However, if the Dollar manages to break out to the upside and challenge resistance (and overcome it) at $88, then expect new lows in Crude (as low as it is) and the downward swing in gold to be realized.

Everything is just so neatly balanced for the moment – perhaps that won’t last long….

Corey Rosenbloom
Afraid to Trade.com

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6 Comments

6 Responses to “A Quick Update on the US Dollar Index”

  1. Anonymous Says:

    “If the Dollar Falls (breaks support), it will likely cause a rally in Crude Oil and other commodities including gold (which is challenging resistance).”

    I do not buy the “including gold” part
    http://globaleconomicanalysis.blogspot.com/2009/02/you-cant-fool-gold.html
    Mish

  2. Corey Rosenbloom Says:

    Mish,

    Thank you for sharing the link. I have added it to the public post to give readers your analysis.

  3. DaveB Says:

    Agree that it’s in an uptrend until proven otherwise. The fact that it made an interim bottom in Dec without having to really test the 200MA support is bullish as well.

    Now a question. What made you decide to label that up move as a 5 wave impulse and not a bearish 3-push pattern? To my untrained eye it looks no different from the 3-push you pointed out in yesterday 5-min DIA chart.

    Apologies if you’ve already answered this, but I’m having trouble differentiating the two. I know that if wave 4 dips into wave 1 territory to lean toward a 3-push interpretation. Any other tips?

    In any case, would you agree that both are bearish structures? The 3-push is a bearish reversal and the 5-wave impulse, even in part of a larger bullish pattern, should still be followed by an ABC corrective move. So both present opportunities to consider playing for a reversal.

  4. Corey Rosenbloom Says:

    Dave,

    Good point – we couldn’t even make it to the 200.

    The Three Push pattern has identical swings (prices) but an Elliott pattern is expected that at least one wave will be longer than the others. In this case, it ‘felt like’ the 5 was the longest, disqualifying it as a “three push”. Plus, the momentum oscillator made new highs on every swing. The Three Push expects a divergence on each swing. Those are the main differences.

    It’s more “Swing Equality” and “Divergence” that cause me to make the distinction. But you nailed it – they both say the same thing – a reversal (or a correction) is imminent.

  5. DaveB Says:

    Thanks for the answer!

    The dollar appears to be getting squeezed between its rising 20ema and that upper resistance line. One is going to have to give way sooner or later. If I were long the dollar I’d be holding but not adding to my positions, and have one hand on the trigger.

    But I don’t think I ever would have been long the dollar because that big momentum low in Dec would have had me waiting for another dip lower and I probably wouldn’t have trusted the rally. Although the bottom of the 4 wave would have been a decent entry point… pullback from the second higher high. Do you have any rules of thumb for when you can start to disregard a price low/high that’s confirmed by momentum and stop waiting for another move in that direction?

  6. Extinct Species Says:

    Maybe the same as DaveB, but why not count it as an incomplete 5? Your wave five looks like 3 waves. Relable 5 as 3 and it looks much more like 5 waves. The triangle then becomes wave 4 with wave 5 still to be completed. It doesn’t channel as well but still not bad and would explain the negative divergence in the triangle as another corrective wave would be coming as soon as wave 5 is complete.

    I just found your site so I’m unaware of your longer term counts. And I’m a novice as I’m sure you can tell.