Technical Assessment - US Dollar

By: Joseph Russo | Fri, Nov 21, 2008
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Casting aside fundamental arguments relative to the long-term viability of un-backed fiat currency, we turn our focus to a purely technical assessment of the past 8-years of price data for the US dollar index.

Technical Tools used in our assessment are the following:

Elliott Wave Architecture

(Analysis & Summary)

From its seven-year 41% highly inflationary decline through early 2008, the dollar has satisfied all tenets of a complete bear market decline at Primary degree. Upon evaluation of larger data-periods, we label the 121.29 print high in 2001, as terminal to a "B" wave at CYCLE dimension.

The unrelenting three-year decline into late 2004, illustrates the downward sub-dividing force of wave (3) at intermediate degree. Despite its deceptively impulsive appearance, the eleven-month 15.22% rise from 80.39 to 92.63 then marked the end of wave (4)'s counter-trend rally.

From its 2005 crest at (4), the first of five waves down at Minor degree extended through December of 2006. Following a brief and shallow rally into January 2007, the dollar resumed its downward spiral, completing sequence to each of the five-waves at Minor degree before terminating wave (5) of "A" at the 70.70 print low in March of 2008. In total, from its (4) wave peak, the five minor waves comprising the larger Intermediate (5th)-wave down took nearly three-years to complete.

Basis our Elliott Wave perspective from the chart high, and in keeping with the repetitive fractal nature consistent with larger degrees of trend, a 2001 turn-pivot high at CYCLE dimension portends that at least three down-waves at Primary degree will follow.

Elliott Wave Theory suggests that from the base of our Primary 'A' wave terminal at the 70.70 low in 2008, an intervening "B" wave rally (the Dollar's current deflationary thrust higher) is likely to be followed by a brutal Primary 'C' wave decline.

Once the Primary advancing "B" wave has crested, fulfillment of such a sequence will soon aid in projecting a price-target window to its corresponding CYCLE-terminal, which in this case is CYCLE wave "C"- down.

Albeit deflationary over the near-term, and despite prospects for an intervening downward correction, note that the preferred Elliott Wave count illustrates a best-case scenario for an intermediate-term "strong dollar deflationary policy" through 2011.

Our ALT: (alternate) wave count reserves plausibility for the Primary deflationary 'B' wave (tan label) to mark early terminal to its Primary crest once the current 22% (and counting) deflationary spike higher reverses course.

Fibonacci Retracement and Time Sequence

(Analysis & Summary)

From our charts peak to trough, three common upward retracement levels (.382, .500, .618) for the deflationary Primary 'B' wave rally cite 90.02, 95.99, and 101.96 as potential Primary degree terminal zones.

General timing of the charts larger Fibonacci turn-year sequence suggests potential for a pivotal yearly turn taking place sometime into the 2009 period, eight-years from the CYCLE wave high. As an interesting aside, Gold has a known 9-year cyclical predisposition to mark critical bottoms concurrently in this same period.

It would be counter intuitively bullish if the dollar were currently striking new lows into the 2009 period (plausibly marking a turn-year low), however the dollar is in its eighth month of vertical rally, suggesting that a continuation of dollar strength into 2009 may usher in a key pivotal top at Primary degree.

From the March 2008 Primary "A" wave base, the smaller monthly sequence of potential Fibonacci turn-bars narrows timing projections to the current 8th month of November, and the 13th month of April 2009 as specific potential turning points. Such guidelines give us fair reason to anticipate key turn-pivots as early as (now) November 2008 and then again as we approach the April 2009 period.

We illustrate another timing sequence of interest reflected in the charts postulated deep corrective (b) wave down through December of 2009. December of 2009 cites a Fibonacci 21-month turn-period extrapolation from the 70.70 low. As an aside, nearby commencement of a plausible yearlong inflationary decline in the dollar may coincide with a reflationary bear market rally in equities and everything else that collectively blew-up in the wake of the dollars deflationary resurgence.

Moving Average Trend Analysis

(Analysis & Summary)

We observe three separate moving averages on our long-term dollar chart. In keeping with Fibonacci numbers, we are tracking the dollars longer-term trends by way of monthly trade and closes above or below the 21, 34, and 55-month moving averages (MMA).

The larger 55-month average (dark blue dots) has kept good pace with the dollars Primary degree trend. Following the 121.29 print high in 2001, the dollar printed its first (sell-signal) close beneath the 55-MMA at 106.11 in June of 2002.

In the three months following, the dollar held, trading mostly higher as monthly closes meandered within tight range north and south of the 55-MMA's trend measure. As illustrated, this upward price movement marked three months of modest rally in terminating the Minor wave-2 subdivision amid the more forceful Intermediate (3) wave down.

By December of 2003, the dollar broke down decisively beneath our largest moving average, succumbing to the undeniable forces of wave (3). Persistently trading well beneath its governing 55-MMA for more than four-years following the breaching sell-trigger, the dollar index remained enslaved amid a Primary bear market.

Upon satisfactorily completing its -5th- of (5) of "A" waves down in March of 2008, and following a 5-month basing process through July of 2008 thereafter, the dollar sparked ignition to a rather impressive vertical lift-off. It is not until forging through its seventh month of parabolic rise that the dollar index returned to re-encounter its 55MMA in spectacularly rapid fashion.

Upon the public's widespread recognition of global economic crises in September 2008, the dollar index lunged continually higher, effortlessly closing above its 55MMA in October 2008 for the first time in five years.

Albeit amid a larger secular bear-market environment, so long as the dollar maintains trade and closes above this monthly moving average, the primary trend-change from down to up shall remain intact.

Still young in its new direction, it is critical to keep an eye on dollar index levels relative to its 55MMA trend gauge. Trade and closes back beneath this gauge may quickly resume the dollar's secular bear market decline.

Chart Patterns

(Analysis & Summary)

Notwithstanding a debilitating deflation, which would manifest with persistent acceleration of the rise in the dollar, it is then quite reasonable for us to anticipate that the massive reflationary measures currently seeded via bailout efforts, would inevitably reverse the deflationary dollar rise.

Translating the assumption that the dollar is at or near a level at which it will soon begin to moderate or reverse; we can see evidence of early development to a significant chart pattern that extends toward 2013.

From the crest at (4) to the current November high, we have drawn a tentative, downward sloping trendline marked by our (R-1 resistance) annotation. To anticipate the lower boundary of this potential chart pattern, we extrapolate and extend trendline trajectory from the March and July lows, and have marked its boundary with the (S-1 support) annotation.

The two lines converge, forming an apex into the 2013, 2014 period. The upper and lower boundaries at R-1 and S-1, create a rather large, and near perfect symmetrical triangle, or pennant pattern.

Relative to the governing trend at larger degree, technicians classify this type of chart pattern as a "continuation pattern". This suggests that probability lies in favor of an ultimate follow-through resolution to the downside.

Whether a bearish or bullish resolution ultimately occurs, the prospective pennant pattern provides us with both upside and downside point-value targets relative to the size of its construction. We discuss these projections under the "price-targets" heading below.

Another chart pattern of particular import, is born by the horizontal line drawn just above the 80-level. This horizontal boundary marker is neckline to a massive Head and Shoulder pattern connecting the lows of 1995 with those printed in 2004. This mega-bearish neckline boundary-marker runs directly through the center of our symmetrical triangle, slicing its 2013 apex in half.

We have provided a small, longer duration chart, which illustrates the enormity associated with this particular Head and Shoulder pattern.

The mega sell-signal that triggered upon breach below this key horizontal marker, has since suspended.

Until its recent vertical rise back above neckline in October 2008, the dollar had spent more than a year in a downward inflationary death spiral beneath it.

So long as the dollar index is able to maintain trade and closes back above this enormous (80.39) sell-trigger boundary, the hyper-inflationary downside associated with it shall remain suspended in lieu of the current deflationary threat taking its place.

Price Targets

(Analysis & Summary)

Upside Targets:

Downside Targets:

Conclusions:

Currencies are central to long-term economic stability. They are critical drivers to all of the financial spheres ancillary measures of productivity and advancement.

In its present role as the world's reserve currency, the un-backed US Fiat-Dollar has benefit of senior status. Such distinction provides a unique competitive advantage relative to global trade agreements.

For generations, and most notably since removing itself from the gold standard entirely, the US dollar has enjoyed what is in effect a worldwide monopoly in "fiat-money".

Exemplified in part by its recent strength vs. other currencies amid threats of systemic financial collapse, the US dollar continues to benefit from its world reserve status. How much longer a US centric advantage prevails is likely to be contingent upon how resolution of the current crisis unfolds.

The die is now cast, and the likelihood of a major paradigm shifts taking root has never been greater.

Rebounding after breaching a precipice from which it may not have returned, the US dollar finds itself in a quandary whereby there is little room for establishing any safety, or comfort zone of meaningful or lasting stability.

Whether a great deflation, hyperinflation, or combination thereof will usher in such shifts in paradigm, respecting trends in currencies, particularly the world's reserve currency, will be of tremendous anticipatory value in preparing for tectonic shifts that may surface in the decades ahead.

In the simplest of terms, based on the approximate level of 80.39, one may associate trade excessively above this level as dangerously deflationary, and trade markedly below it, as an equally dangerous hyper-inflationary gauge.

The root question remains unanswered as to why financial markets spike and plunge to dangerous extremes when the dollar trades just 15% above or below the 80 level.

Could there possibly be a viable way to "fix" a floating fiat currency at just the right price to please the markets and maintain a stable economy. With all of the unprecedented rule changes taking place on a near daily basis, we suspect that nothing is off the table when a monopoly of such import is at risk of systemic failure.

In Sum:

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Joseph Russo

Author: Joseph Russo

Joseph Russo
Chief Editor and Technical Analyst
Elliott Wave Technology

Joseph Russo

Since the dot.com bubble, 911, and the 2002 market crash, Elliott Wave Technology's mission remains the delivery of valuable solutions-based services that empower clients to execute successful trading and investment decisions in all market environments.

Joe Russo is an entrepreneurial publisher and market analyst providing digital online media solutions designed to assist traders and investors in prudently and profitably navigating their exposure to the financial markets.

Since the official launch of his Elliott Wave Technology website in 2005, he has established an outstanding record of accomplishment, including but not limited to, ...

  • In 2005, he elicited a major long-term wealth producing nugget of guidance in suggesting strongly that members give serious consideration to apportioning 10%-20% of their net worth toward the physical acquisition of Gold (@ $400.) and Silver (@ $6.00).

  • In 2006, the (MTA) Market Technicians Association featured his article "Scaling Perceptions amid the Global Equity Boom" in their industry newsletter, "Technically Speaking."

  • On May 6 of 2007, five months prior to the market top in 2007, though still bullish at that time, he publicly warned long-term investors not to be fooled again, in "Bullish Like There's No Tomorrow."

  • On March 10 of 2008, with another 48% of downside remaining to the bottom of the great bear market of 2008-2009, in "V-for Vendetta," using the Wilshire 5000 as proxy, he publicly laid out the case for the depth and amplitude of the unfolding bear market, which marked terminal to a rather nice long-run in equity values.

  • Working extensively with EasyLanguage® programmer George Pruitt in 2010 and 2011, the author of "Building Winning Trading Systems with TradeStation," he assisted in the development of several proprietary trading systems.

  • On February 11, 2011, he publicly made available his call for a key bottom in the long bond at 117 '3/32. Within a year and half from his call, the long bond rallied in excess of 30% to new all time highs in July of 2012.

  • For the benefit of members and his general readership, he responded to widespread levels of economic and financial uncertainty in the development of Prudent Measures in 2012.

  • He publicly warned of a major top in Apple on October 26, 2012 in the very early stages of a 40% decline from its all time high.

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