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July 15, 2007

US Dollar Update
by David Petch

Hope everyone is having a better day than the US dollar is having. I expected the USD to remain within a wedge structure, but that pattern was invalidated as will be shown in the charts below. The USD is still developing a terminal impulse, but it is going to take on the appearance of a channel or an expanding wedge (if the USD goes below 79.5). There is too much to lose if the USD is let to decline below 80.0 for an extended period of time, but I do expect 79.5, maybe even 79.0 to be briefly tested before starting the next move up in wave [C].x of the non-limiting triangle.

The lower Bollinger bands are engulfed below the current USD price, suggestive no bottom is yet in sight. The upper BB's are rising, suggestive not top is in place. Based upon the positioning of the BB's the USD is likely to experience weakness for at least 2-4 weeks. The upper BB's should at least begin to curl down before a bottom is in place, so watch for a basing pattern between 79-80.5 over the next month or so. Fibonacci time extensions of various waves are shown near the lower portion of the chart, with the next Fib date occurring on August 1st; this time frame matches the above observation of expected weakness in the dollar for 2-4 weeks.

Figure 1

Fibonacci price projections of downward trending wave price action projected off their subsequent retracements are shown on the right hand side denoted in red. Two Babson channels are drawn in place to illustrate the dimensions of channels that have developed over the course of the past 18 months. Both channels have lines intersecting to form a wedge, which was nullified by the USD action this AM hitting around 80.39. Full stochastics have the %K beneath the %D, with at least 2-4 weeks before a bottom is put in place. There is incredibly strong support around 80 and also above 79.0.

Figure 2

The weekly chart of the USD index is shown below, with blue lines on the right hand side representing Fib price retracements of the decline from early 2003 until early 2005. Red lines on the right hand side represent Fib price projections of the decline projected off the April 2006 top. The lower Bollinger bands are near a focal point just above 80. Generally when Bollinger bands are beneath the index price after a long decline phase, with stochastics at the base of the channel, it is a good indication that a bottom is not too far off. No one can guess when the bottom will precisely occur or at what precise level (a range can be given, but not a pin point level), but the signs are in place that a bottom is in the process of developing over the next 2-4 weeks. It might even take longer before the bottom is put in place and I think the struggle for gold to move above  $660/ounce may be foreseeing this. Gold is likely to rally with the USD over the course of the next year, but gold will do far better (the USD is likely to grind sideways between 80-84). Full stochastics have the %K beneath the %D and has been in a downtrend since April 2006. The 14 month decline has created an oversold condition, but the USD can still become “more oversold”. Negative and positive divergences lasting two years were in place before declines and advances occurred, respectively, so it is likely that the USD after basing will set up a negative divergence over the course of the next two years before really breaking down.

Figure 3

The mid-term Elliott Wave chart of the USD index is shown below. The trend lines shown below indicate the USD broke below the lower trend line, thereby invalidating the development of a wedge pattern. Instead, the terminal impulse pattern is going to take either the form of a parallel channel or an expanding wedge, depending upon where the USD puts in a final low. Wave [B] is a flat structure, with sub wave (C) putting in a terminal impulse pattern (lacking a wedge shape).

Figure 4

The long-term Elliott Wave chart of the USD index is shown below, with the thought pattern denoted in green. The decline from 2003 until early 2005 was a double zigzag (5-3-5-x-5-3-5), with a suspected non-limiting triangle forming since. Wave (W).[A] and W.(X).[A] were elongated flat structures that usually occur in triangles and as such, developed the hypothesis that the USD index is in a non-limiting triangle. The pattern should end by late 2009/early 2010 before definitively breaking below 80. At that point, it may be worth taking out loans in USD and pay it off in a different currency. This is something I will be looking at in the coming months. After the USD bottoms over the course of the next 2-3 months, expect a slow and grinding wave [C] to take the dollar up to 83-84 over the course of the next 8-12 months thereafter. How does gold expect to fair in all of this? I expect gold to break $1000/ounce in the next 12-18 months, with the really big move occurring from 2010-2013.

Figure 5

I cover the USD Index, S&P 500 Index, AMEX Gold BUGS Index, AMEX Oil Index and the 10 Year US Treasury Index. Captain Hook, the site proprietor of TreasureChests posts 2-3 times per week with coverage of very important macro issues and how they relate. Also, we currently track some 60 base metal, energy and precious metal stocks.

With the above being just one example of how we go about identifying value for investors, if this is the kind of analysis you are looking for we invite you to visit our site and discover more about how our service can further aid in achieving your financial goals. In this regard, whether it's top down macro-analysis designed to assist in opinion shaping and investment policy, or analysis on specific opportunities in the precious metals and energy sectors believed to possess exceptional value, like mindedly at Treasure Chests we in turn strive to provide the best value possible. So again, pay us a visit and discover why a small investment on your part could pay you handsome rewards in the not too distant future.

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David Petch
TreasureChests.info

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