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US Dollar Update: A Bottom Is Looking Imminent


With no QE3 coming and the euro looking dour, a rally for the greenback is on its way. We can time it using Elliott Wave Theory.

I think that short positions on the dollar right now are very high-risk.

Two weeks ago, the dollar gave some false signals, apparently indicating that it was nearing the end of its correction. At that time, it appeared to have formed an expanded flat, with wave C-down in process and close to completion. That turned out not to be the case. It now looks likely that wave ii is not an expanded flat, but a simple A-B-C zigzag sharp, which means wave C-down of two weeks ago was actually wave A-down. C-down, the final wave of the correction, is either in process now, or has already bottomed.

The dollar is now rapidly approaching its adjusted targets under this count. If C = A, then the target for the bottom is 74.06. If 5 = 1, the target would be 73.66 (see final chart to understand which waves I'm talking about). However, wave ii has already staged an extremely deep retracement, having now passed the 78.6% retracement level, so these targets may or may not be hit. Given the deep retracement, it would not be surprising to see wave 5 truncate, and put in a bottom without reaching these levels. Under my alternate count (see "Alt: C" label on final chart), the dollar already bottomed.

So it is my belief is that the dollar could bottom anywhere between its current position (75.06) and 73.66.

Based on this count, I also maintain that the dollar is about to begin what will ultimately become a massive rally. The key level to watch, though, is 73.42. If the dollar bulls can't hold that level, all bets are off.

My personal belief is that they will hold that level. The target for the bottom of wave ii lines up nicely into the time window of the Fed meeting -- but again, wave ii-down has done enough work and even though Uncle Buck could still head toward 73.66, further declines are unnecessary.

Regarding fundamentals: I am almost certain that there's no QE3 coming right now, so that might be a good "reason" for the dollar to rally. Besides, the euro still doesn't look any better after the "solutions" presented at the European summit last week.

The first chart I'd like to present is my multi-century dollar chart (I haven't updated this chart since September 3, because it took me forever to put it all together in Photoshop in the first place). This chart uses the dollar-relative-to-gold as the proxy for charting the first few hundred years, since there was no dollar futures market back then. It is my preferred view that the dollar based Grand Supercycle Wave A in 2008, and thus the 2008 print low should mark the bottom for a long time to come.

Click to enlarge

The next chart brings us in at the daily level. My preferred view is that the coming rally is part of a nested 1-2 count, but it's also viable that red wave 2 instead bottomed where the gray "Alt: 2" label is placed. Both counts are very bullish for the dollar:

Click to enlarge

The final chart takes a look at the short-term picture. We can see a very clean five-wave move for wave A, a pretty solid triangle formation for wave B, and three waves down complete for C. Wave 4 of C appears to still be in process, with the fifth and final wave yet to come. The alternate count says wave C bottomed last week. If that's the case, the rally has already begun.

The triangle adds some confidence to the idea that the dollar is about to (or has already) put in a bottom. Under Elliott Wave Theory rules, triangles only form as the penultimate (second to last) wave. Assuming the triangle interpretation is correct, wave C should be the final wave of this wave ii correction, and the dollar should put in a base and begin a strong rally in the very near future.

Click to enlarge

If the dollar and equities continue moving inversely to each other, these dollar charts lend credence to the wave counts in the equity markets, and imply the following:
  1. Stocks are, indeed, completing the Minor Wave (2) rally. As the dollar begins its strong rally in Wave iii-up, equities will begin staging a strong decline in Wave (3)-down.
  2. The Minor (2) stock rally is also complete or approaching completion, as indicated in Friday's charts and update.
Of course, there's no law that says stocks and the dollar must always trade inversely correlated; and there's no law that says my interpretation is correct (unfortunately -- a law like that would sure make my life a lot easier! Everybody write their congresspeople). However, all the charts seem to be in sync, and they're sending the signal that things are about to change, both for the dollar and for equities, in the very near future ... and in a very big way.

Either the dollar holds the key levels and rallies, or there may be major trouble brewing on the dollar's horizon. My preferred view is that it will hold and begin what will ultimately become a massive rally. This has the all the potential to be a historic turn week in the markets. Trade safe!

(See also: SPX and NDX Update: Key Levels That Could End This Historic Rally and SPX and NDX Update: Last Call for Bears!)

This article was originally published on Pretzel Logic's Market Charts and Analysis.

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