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U.S. Dollar: Are We Seeing Evidence of a Turn?
Enjoy another Market Insight comment by EWI's Senior Currency Strategist
Jim Martens, Elliott Wave International's Senior Currency Strategist, regularly posts thoughts on the business of forex trading for his subscribers. Below is Jim's latest Market Insight, posted on the morning of May 22:
Market Insight (Intraday)
Posted On: May 22 2009 8:43AM ET / May 22 2009 12:43PM GMT
You've heard me say a million times both in my forecasts and weekly videos that in proper Elliott wave analysis, wave structure of a market move trumps wave measurements every time. Proportions between waves are important, but it's only when both the wave structure is completed and a measurement is approached that a wave pattern is coming to an end.
Let's consider the present situation with the U.S. Dollar index as an example. Looking at the big picture, the Index is approaching the point where the decline from March will consist of three waves, with two of them (the ones pointing down) being equal.
Both of those characteristics -- a three-wave move with first and last legs equal -- are traits of corrective Elliott wave patterns. That warns us to look for evidence of a bottom in the DX. The ideal piece of evidence would be an impulsive (5-wave) rally from a low, followed by a corrective (3-wave) setback. That would also give us a price level (the low) that, if crossed, would signal that the idea of a turn is incorrect -- something you could use for good money management.
What's lacking so far today (May 22) is that impulsive rally. But the Index does show a likely five-wave decline sequence from 83.22, complete with a potential bullish divergence accompanying the ostensible fifth wave.
Let's break it down market-by-market. The euro represents a stout 57% of the Dollar Index, and it has satisfied our upside expectations by pushing the EUR/USD above $1.3736. The USD/CHF reached its measured objective ($1.0939) earlier this week. Sterling has been strong. So, does the market show evidence that a bottom may be near? We are seeing signs of that, but as of this moment, all of the dollar's competitors are still pushing against their highs, so we are left riding the dominant trend (i.e., dollar weakness) until there is actual evidence to the contrary.
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Moving beyond charts, my subscribers know that I always start my morning intraday comments by reviewing the big picture. I also keep an ear tuned to the financial news. I'm not so much interested in what they think about the markets as I am in the topics being discussed. Lately, it's been the dollar. There is a growing concern that with the dollar at its lows for the year, it may become more difficult for the U.S. to issue bonds to fund our enormous deficit. Add to that all the talk of replacing the dollar as the world's reserve currency -- and there is plenty to keep these discussions going.
But isn't it interesting that this coverage has been increasing as the U.S. dollar pairs are reaching their measured price targets? As these discussions increase even more, we'll be watching for evidence that "the dollar concern" has reached a peak. At that time we will want to be contrarians. But for now, it's wave structure, structure, structure.