Long Term Structure of the US Dollar Index

Dec 21, 2008: 10:02 PM CST

A lot of us are getting caught up in the recent strength… now weakness… in the US Dollar Index, but some may have forgotten the long term structure that overlays the current price movements.  Let’s take a look at the US Dollar Index from 1984 to present and try do determine an appropriate backdrop from which to characterize the most recent price action.

US Dollar Monthly Chart from 1984:

Despite a healthy move from 1995 to 2001, the US Dollar Index actually has been in a large scale downtrend from whence the data was available on this chart.  I didn’t classify every price swing, but one need only look at the larger structure to see the current up-move (and it was a big one) was a mere retracement against the prevailing, larger down-trend.

The moving averages are in the most bearish orientation possible, and price is currently failing to maintain support above these averages.  It will take further basing here – or further price appreciation – to change this powerful down-trend structure.

Let’s zoom the monthly chart into the period from 2000 to 2008, which roughly corresponded with the years of the Bush Administration.

US Dollar Monthly Chart from 2000:

Price peaked officially in 2001, though price attempted one more swing to the upside in early 2002, forming a sort of “Three Push” or triple-top pattern on a massive negative momentum divergence.  So began the sweeping downtrend we are experiencing to this day.

It is possible that we are either experiencing or completing Wave 4 of a larger down-Elliott Impulse, which would imply that eventually lower index values are yet to come.  I do want to note the new momentum high that set-up recently as price broke above the falling 50 month EMA – while bullish, price has failed to realize a new swing high, and the large-scale downtrend is still in full force with absolutely no sign of reversing (to reverse it, we would need to see price put in a higher high and a higher low and break above the 50 month EMA).

Price also has fallen short of the large scale 38.2% Fibonacci retracement of the 2000 peak to the 2008 lows, which stands at roughly $90.00.

I will say that price has met its objectives on the daily and weekly charts (in terms of prior support, Fibonacci levels, and EMA support).  There could be a short-term rally in store, but ultimately, no signs are pointing to renewed life yet on the larger monthly time frame.

By the way, a weaker Dollar is not necessarily bad across the board; in fact, a weaker dollar helps US Multinational corporations such as McDonalds (MCD) and Caterpillar (CAT), as well as boosts commodity-based companies and commodity prices.  A weaker dollar can also boost tourism to the US as travelers from foreign countries take advantage of the relative strength of their home currency.  That being said, a weaker dollar hurts smaller companies and US tourists who travel outside the USA.

Continue to keep watching the US Dollar Index closely, as well as the other interrelated commodity markets for continued price clues as they develop.

The Market Club does a good job of following FOREX and currency trends, as well as commodity contracts.  The two-month trial offer is still good so please take advantage of it if you have not done so already.

Corey Rosenbloom
Afraid to Trade.com

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17 Comments

17 Responses to “Long Term Structure of the US Dollar Index”

  1. Anonymous Says:

    Great post. I wonder if you think there is too much overlap between wave 2 and 4.

  2. Corey Rosenbloom Says:

    Anon,

    It’s not so much the problem of 2 and 4, but rather than Wave 4 enters the price territory of Wave 1 which shouldn’t happen. It’s difficult to find some other wave count structure that doesn’t have this happen, even on the current up-impulse on the daily/weekly charts.

    It’s possible that the preferred count is a complex corrective structure, but it appears that this count is a relatively acceptable count, given that the 4s slightly encroach on the 1s which isn’t ideal.

  3. David Says:

    Thanks Corey, I really appreciate you making these charts. Great post.

  4. AMA Says:

    Again excellent post, I would see wave 1 starts from the high of 2003, your B is the end of wave 3, C would be 4, and then 5 is circled 3. ABC correction started with A complete and now in B may complete any time, then C impulse should start.

  5. toad37 Says:

    Great post Corey, thanks.

  6. Man4urheart Says:

    This is a beautiful post. I always wanted to have a long term view on Dollar but didn’t have data for same!

    I linked this post on my page to refer time to time for review!

    World is driven by Dollar as of now and well said any movement big in Dollar can change dynamics of world and should be closely watched!

  7. Anonymous Says:

    Thanks for your post it helps me a lot. This is the best post i ever seen. Just want to say Keep making your blogs readable and fits the information of what the readers wanted.It helps me a lot. Thanks again.

  8. Andrew Stanton Says:

    On the second chart, I would move 1-2 to the first up-down right after circle 5 and relabel circle 1-A as its corresponding 3-4 and 1-2-3-4 as i-ii-iii-iv. B would become A and circle 2 would become B with circle 5 as C. If you look at the first chart, whatever is going on from the 1985 high looks corrective and the 2001 to 2008 move is a clear 3 (A-B-C). It’s too early to get a reliable count on the 2008 rally and how it fits into the big picture.

  9. Corey Rosenbloom Says:

    AMA,

    That’s another possible interpretation, which would have the “ABC” corrective phase taking place sharply.

    The reason I didn’t choose that count was because it places Wave 3 as the shortest wave. Wave 1 would be from $100 to $85 for $15 points, then Wave 3 down would be $92.50 to $80.00 for $12.50 points. Wave 5 would be the largest, and again this count violates the “Wave 3 can never be the shortest” principle.

    I would like to call the whole first move down Wave 1 but there’s an extra swing in there that throws off a pure count.

  10. Corey Rosenbloom Says:

    Man,

    Thank you for linking. Indeed, many eyes are on the Dollar, but the recent strength has not been due to US economic dominance, but from expectations that global economies will fall faster (or are falling faster) than the US, thus the dollar rose on a relative basis.

    A major turn will create ripple effects felt throughout the entire investment world.

  11. Corey Rosenbloom Says:

    Anon,

    Thank you for reading and for your comment!

  12. dacian Says:

    Thanks Corey, I was also thinking to remind about the economic cycle here (so a bit of fundamentals). We’re in the middle of debt bust and credit destruction; this period is one when cash is king. If deflation continuous in 2009 and beyond, the green will move higher. For now, there are no signs out there that deflation is ending, we’re just entering and the Japanese experience shows us it might take years. Is such, the green might be at the beginning of a new bull market (do we always have the 5th wave down in a bear market?). Remember, the dollar is coming here from a multi-year bear market. There is a funny video on marketclub, which talks the dollar index as well.

    http://broadcast.ino.com/education/trading_desert_island/?blog

    PS: Corey, a look at the gold chart might be interesting; I was asking for it but you probably missed my comment. As they move in opposite directions ($ vs gold), it might worth looking

  13. Corey Rosenbloom Says:

    Andrew,

    I’d figured the recent move was part of a corrective phase but couldn’t get the waves to play out like I expected. Your count makes sense. It makes for a fiercely bloody A wave down though.

    I initially figured we had a completed ABC into the 2008 lows but that was hard to fit into the larger picture and also keep in line with what’s happening currently.

    It may indeed be early, but do you think we could be starting a fresh new Elliott Impulse up?

  14. Andrew Stanton Says:

    Two observations. The monthly charts show structures at such a large scale that it is almost academic since it is difficult to invest let alone trade in that time frame. I think currencies and interest rates have the same problem that commodities have in that they do not count the way equities do. Prechter talks about it in the commodities section of chapter 6 of Elliott Wave Principle. Since the decline to 2008 was a 3 wave structure, the rally from that low could be a continuation of the larger correction that ends up as a 3 wave B, C, X or Y or a five wave C OR the beginning of a new impulse wave up; I see all those as potential counts. The joy of Elliott corrections!

  15. Man4urheart Says:

    Ca you also do a analysis on EURO and GBP for long term similar to USD.

    Also can you explain the relation between them?

  16. Corey Rosenbloom Says:

    Man,

    I’ll do so – thank you for the inspiration!

  17. Kanike Sridevi85 Says:

    Thank you  sir for providing this kind of information.I'ii do so.
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