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Tracking the Dollar Index Into a Correction


An upside target for this likely correction will be the 80 to 82 area.

Yesterday's Notable Technical Developments

Stocks put in a modest up day on average volume as downward pressure on the US Dollar overcame nervousness about Dubai debt fallout.

Bonds traded higher in price once again, but only modestly so.

Commodities traded higher on the downward pressure in the greenback -- gold eked out a gain and oil finished significantly higher on geo-political concerns in the Middle East.

As mentioned above, the US Dollar Index finished in the red for the day Monday -- but well off the session lows (and still above support) after gapping significantly lower.

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Critical Market Components

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Chart of the Day: The US Dollar Index

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  • The US Dollar Index is perhaps the most watched instrument in the financial world right now. Friday provided further evidence that any geopolitical instability will cause a "flight to safety" into the greenback and the Japanese yen.

  • Friday also provided evidence of what happens when the Dollar Index receives that kind of buying pressure -- stocks around the world were sold aggressively; commodities tumbled significantly, and US Treasuries rose sharply as money rotated out of risk assets.

  • That last point is very interesting as it represents a divergence from what we've observed recently (higher bond prices leading to a lower US dollar). The Dollar Index and US Treasuries rose together Friday as capital preservation trumped relative yield.

  • My firm, ThirdWave, is bullish on the greenback; Its Elliott Wave count puts the Dollar Index in the final stages of wave v of 5 -- with a powerful corrective move (three waves of 5-3-5) to follow. Our upside target for the Dollar Index on this likely correction will be the 80 to 82 area. A long position provides much more upside potential than downside (using the support level of 74.20 as a stop) at current levels.

Strategy: My firm's target for the US Dollar Index was 74.36 and it has been met. We are now playing the long side of DXY via the UUP ETF with a stop in place on any close below 74.20.

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Position in DXY

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