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Minyan Mailbag: What's the "Right" Perspective?


Things may not be as they seem


Editor's Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

One of the best things Dorsey, Wright did over the past few years, in my opinion, was to be willing to change the scale size of the boxes they use.

Case in point is your chart of the US Dollar Index in (yesterday) morning's "Buzz." While it is close to the upper band/zone in all three scale sizes, if you change the scale to .50x3 or .25x3, the chart is much more bullish, again, in my opinion. Thoughts?

Minyan Art

Minyan Art,

I agree. It is important to look at charts in different scales to gain additional perspective. It's similar to looking at bar charts from weekly down to hourly. For example, a weekly chart of a stock may look quite bullish, while zooming in to see different time scales, daily, hourly, may reveal near-term pitfalls.

Since point & figure charts are price sensitive and not time dependent, the scale must be changed, increased or decreased, to view the chart patterns in different perspectives. Let's do this with the US Dollar Index to see how this can help.

The 1x3 chart of the US Dollar Index we posted yesterday morning (see it here) with the trendlines I've drawn illustrates how much work lies ahead for the dollar to continue to improve technically. As I pointed out this morning, the long-term 1x3 scale shows how an "investor" like Warren Buffett can still view the longer-term prospects for the dollar with decided bearishness.

There are a lot of peaks and valleys that can show up between now and the long-term however. Even Buffett himself last week on CNBC remarked that he had no idea what the dollar might do between now and the next year or so. He remarked that his view was that five years from now, however, the dollar would be lower for a variety of fundamental reasons.

When we take the scale down to .5x3 we can get a closer view of the probabilities for the dollar's path. This chart below shows the recent shorter-term trendline break at 88, which should act as some intial support, then the longer-term support around the former resistance area (also visible on the 1x3 chart) at 85.

U.S. Dollar Index Spot (DX/Y)

Chart courtesy Dorsey, Wright & Associates

Taking the scale down even further to the .25x3 scale, we can see another perspective.

U.S. Dollar Index Spot (DX/Y)

Chart courtesy Dorsey, Wright & Associates

The dollar index has been "doing work," consolidating above the trendline that was broken back in January. But note that the levels we've identified as important on the other two scales, the near-term 88 level, and the longer-term 85 level, also show up as important here.

By evaluating multiple scales we can fine tune our long-term and short-term perspectives. So you are right, Art, the shorter-term views are decidedly more bullish than the long-term picture, but when we put all the pieces together we can develop a more accurate road map for expected probable paths.

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