Reversal in the US Dollar Index Underway

Nov 25, 2008: 7:38 PM CST

An interesting potential reversal is underway in the US Dollar Index, which could give a boost to commodity prices in the short term.  Let’s look at this development, and also a potentially complete Elliott Wave Impulse graph of the Dollar Index.

Dollar Index Daily:

:

The US Dollar Index has surged steadily from its April bottom to a peak of $88.00 earlier in November.  Price is now forming complex momentum divergences and potentially has completed a full Elliott Wave Impulse to the upside.

Notice how the key 20 and 50 day EMAs have contained price movement and served both as support and as potential low-risk entries into a moving trend.  The rising 20 day EMA has been broken on a closing basis officially today, so the structure could be changing and we need to be aware of this shift.

The next logical ‘test’ or magnet zone price will likely reach is the $84.00 level, which represents the rising 50 day EMA.  Failing this level – which may be more likely than not – price would fall further, perhaps to test the $80.00 level which represented the September swing high (old resistance becomes new support).

Also, I wanted to highlight the complex divergence pattern in the 3/10 momentum oscillator.  It appears that the oscillator (focus only on the black line) has formed a sort of head and shoulders pattern underneath price, which could hint at further weakness to come.  Regardless of this complex interpretation, one can see – provided you look at the red arrow – that the most recent price high into $88.000 has formed a significant negative momentum divergence that is currently unwinding with declining price.

Combine this fact with the apperance of positive momentum divergences on various commodities (crude oil included), and we could have a significant cross-market shift underway which requires your further attention and analysis.

Let’s take a look at a possible Elliott Wave Analysis of the US Dollar Index (Daily Chart).

Dollar Index Possible Elliott Wave Count:

Also, notice how momentum divergences play into the Elliott count.  Oftentimes, negative momentum divergences occur in 5th Waves, which is a further sign of weakness (and non-confirmation of higher prices).

That being said, Wave 1 was a rather complex ‘bottoming’ wave that I highlighed in the past (of course I didn’t know it was Wave 1 then) as having multiple swing divergences, and it appeared that momentum was building to the upside.

Price then formed a rather standard Wave 2 correction becfore bottoming in July, slighly higher than the April lows, which also locked in a ‘higher low’ in terms of price structure.

The uptrend was officially confirmed as price broke above its June high, having taken out the most recent swing high along with forming a higher low – this was your highest probability entry and created what I like to call the “Sweet Spot” structural trade.  This structure formed the base of the Third Wave Impulse up to September highs, which also created a negative momentum divergence.

Wave 4 was a rather sharp (steep) ‘abc’ corrective wave down to a $76.00 level price low.

Price then topped the $80 level, which confirmed we were likely in the structural Wave 5, which itself sub-divided into a (relatively) clean five-wave impulse before forming the current negative momentum divergence and potential ‘topping’ pattern we see now.

Continue to study this with your own interpretation, but be alert that a potential shift could be occurring quickly.

Corey Rosenbloom
Afraid to Trade.com

7 Comments

7 Responses to “Reversal in the US Dollar Index Underway”

  1. Josh Fielden Says:

    The problem with that EW count on the US Dollar Index is that count is not clear-cut on some of its componenet parts. Try putting an EW count on the Euro or the Yen. The problem is Waves 1 and 2. Could be your Wave 5 is in fact the top of Wave 3 !

  2. Corey Rosenbloom Says:

    Josh,

    I considered that possibility – that of an extended third – but decided that would be my alternate count should a clean ABC not form. The divergences helped shape the analysis as well. I’ll do so with the other currency indexes.

    Whether we are about to head into a possible ABC phase or a Wave 4, the risk/reward (highest probability) remains to the downside in the short-term so it’s probably a good bet to unwind any short-term bullish dollar bets.

  3. Anonymous Says:

    Hi Corey, with your experience I was wondering what you’ve heard is best for running multiple charts on your monitors with signals real-time? I have been looking into e-signal, metastock, vectorvest, marketclub, etc. I posted recently and you indicated marketclub lags a bit with real-time data but their signals are excellent. Are those signals intra-day? Thanks for all your great analysis provided daily.

    Matt

  4. Corey Rosenbloom Says:

    Matt,

    I run TradeStation on two monitors and have a laptop on which I do most of my non-trading activities and have never had a problem. I haven’t demoed most other brokers but was an Ameritrade client prior to TS. RealTick might be one to consider as many pros swear by it but it can be expensive if you’re just starting out. TS is free provided your trading activity meets a certain threshold.

    Regarding MarketClub, I don’t mean to knock them but I see them more as an end-of-day analytical tool for bigger picture analysis, reading commentary, scanning for new signals that triggered, and mostly for setting up larger scale structure or analysis in terms of the weekly and daily charts. Their data does update intraday but it does so on a lag. They employ their own formula for signals using various inputs of indicators which is unique to them.

    If you really want to compare brokers across various components, I’d recommend http://www.elitetrader.com/ which is mainly a trader forum (as well as http://www.traderslaboratory.com) for discussing user feedback and recommendations.

    If I can be of additional assistance, I’d be happy to help.

  5. Dominick Says:

    Hello Corey. I read that you were previously an Ameritrade client. I am currently with them running on strategy desk however I was thinking of jumping over to Trade Station. Can you let me know which one you perfer and why? Thanks. Have a great Thanksgiving.

  6. David Says:

    Hi Corey,

    Monthly time frame is it an ABC ? Bullish Harami today , lets see if it makes a lower high which which would a be a real nice short entry spot .

  7. forexmacro Says:

    forexmacro…

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