by Bob Stokes
Updated: March 27, 2017
Knowledge of sentiment measures combined with a market's Elliott wave pattern is key in forecasting. The U.S. Dollar Index provides a perfect example. Read what our March 24 Short Term Update has to say.
[Editor's Note: The text version of the story is below.
When a financial market's Elliott wave price pattern and sentiment measures send the same message, it's time to pay close attention.
Consider the U.S. Dollar Index. Near the end of 2016, traders were extremely optimistic about the greenback. Their optimism kept rising as the dollar kept getting stronger: Since Aug. 18, when prices met the trendline from the May 3 low, the buck had risen from 94.077 to 103.650 on Dec. 20.
Our Dec. 21 Short Term Update said:
At the least, the 90.2% 5-day Daily Sentiment Index level (courtesy trade-futures.com), the highest since the wave (3) top in March 2015, indicates the high probability for a near term decline. Even if prices push to another new high, the extreme level of dollar optimism suggests the bullish potential is limited.
As you probably know, when sentiment reaches an extreme, either bullish or bearish, it's usually a signal that too many traders are standing on one side of the boat. It's then just a matter of time before the boat capsizes.
The dollar's Elliott wave structure supported the signal that the extreme sentiment measure was sending.
Our Dec. 28 Short Term Update remarked:
The [U.S. Dollar Index] remains at or very near the end of a … rally. Once this … [Elliott wave] pattern is confirmed as complete, the dollar should undergo its largest decline of at least the past four months.
Just four trading days later, on Jan. 3, 2017, the greenback hit a high of 103.820.
The U.S. Dollar Index has since experienced a significant decline, as forecast.
This chart from the March 24 Short Term Update (entire wave labels available to subscribers) shows that the index fell to 99.233 on Feb. 2. A rally followed, but then was followed by another decline.
The March 24 Short Term Update remarked:
The bullish case for the [U.S. Dollar Index] is clearly on life-support.
A March 26 CNBC headline reads:
Dollar stumbles after Trump’s health-care flop bashes confidence
But, as shown, Elliott wave patterns helped us and our subscribers anticipate a decline in the dollar well before the House GOP cancelled the March 24 vote on the American Health Care Act.
Today, the U.S. dollar stands at a key juncture.
Our publications are now preparing subscribers for what will take many greenback traders by surprise.