An Elliott Wave Analysis of the U.S. Dollar

By: Robert McHugh | Fri, Dec 22, 2006
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Check out this monster below -- It tells you all you need to know about what the Fed has been doing with M-3. First of all, let's examine the pattern. It is a Head and Shoulders top. These patterns are highly reliable. It is not yet a "confirmed" pattern, meaning until prices drop below the neckline decisively, say below 80.00 to 77.00 or so, the probability of the minimum target of 40.00ish being hit is not as great. However, should we see the Dollar drop down to 77.00ish, we are in a high risk situation of a devaluation of the dollar all the way down to 40.00. Not all at once, but over the course of several years. Perhaps all at once, should the government elect to flat-out issue an edict that a dollar is suddenly worth 50 cents.

Would they devalue the dollar in half? Maybe. Why? It is a way to repudiate half of all the debt in the United States. Why would they want to do that? Perhaps if a recession became a depression, or the risk thereof. Perhaps if housing was to absolutely dive into the tank. It would be a way to relieve mortgage holders of a huge chunk of their obligations in lieu of mass foreclosures.

The pattern is ominous as far as its size, its timeframe, and as far as its downside implications. This pattern is textbook. No flaws. In fact it carries a rare added textbook feature of a weaker right shoulder than left. That is not good. This is right in line with the Fed's decision to hide M-3, enabling them to hyper-inflate the economy with too much money for secret purposes (The Working Group's minutes are secret, their market buying intervention activities are secret, the quantity of M-3 being created is secret). Any auditor worth his salt will tell you that secrecy breeds mischief, often with dire consequences. The founding fathers established accountability in our constitution, and it can be easily argued that the Federal Reserve and the Working Group (a.k.a. Plunge Protection Team) are managing M-3 in violation of that spirit.

The next question is, will the Dollar fall to 77.00? A look at the above chart shows the U.S. Dollar formed a Head and Shoulder Top over the past few months, and predictably hit its minimum downside target of 83.25 a few weeks ago. In fact, it fell further. Note that the above H&S pattern had a weaker right shoulder than its left, similar to the multi-year pattern we are warning about.

The Elliott Wave labeling shown above suggests more downside is coming. The Dollar finished its descent into wave iii down, and completed its Minuette wave iv corrective rally. Wave v down of Minor 1 down is well underway, with the recent rally the bulk of Micro wave 4 up, inside wave v down. Wave v down could nestle around the 80 area +/-. Once wave v of 1 down bottoms, next will be a corrective wave 2 up, as the neckline provides support for a short while before the breakdown south, wave 3 down that would create all the technical damage necessary to send the Dollar into new territory on its journey toward the 40s.

Is there more evidence that the Dollar will even hit 77.00? Yes, there could be. The next chart shows it is possible that yet another Head & Shoulders top is in formation, and we annotate its projected completion. If the Elliott Wave labeling occurs that we expect, then this newest H&S pattern will complete and confirm, with a minimum downside target of 70.00ish, well below the necessary 77.00 target for confirmation of the mega-Head & Shoulders pattern from 1992 through 2006.

This is risk analysis, not trading advice. But this risk is enormous, for if the Dollar in fact devalues 50 percent, it will change life as we know it, which is great long-term for Gold and Silver of course.

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"Then Herod secretly called the magi, and ascertained
from them the time the star appeared.
And he sent them to Bethlehem, and said, "Go and make careful
search for the Child; and when you have found Him,
report to me, that I too may come and worship Him."
And having heard the king, they went their way;
and lo, the star, which they had seen in the east, went on before them,
until it came and stood over where the Child was.
And when they saw the star, they rejoiced exceedingly with great joy.
And they came into the house and saw the Child with Mary
His mother; and they fell down and worshipped Him;
And opening their treasures they presented to Him
gifts of gold and frankincense and myrrh.
And having been warned by God in a dream not to return to Herod,
They departed for their own country by another way."

Matthew 2:7-12

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Robert McHugh

Author: Robert McHugh

Robert D. McHugh, Jr. Ph.D.
Main Line Investors, Inc.

Robert McHugh

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at The statements, opinions and analyses presented in this newsletter are provided as a general information and education service only. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.

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