Wave Analysis of USD (by Avi Gilburt)

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If you listen to many of the market analysts discussing the dollar and its relationship to the metals, or to the equity markets, it seems as though there is much confusion. The confusion is due to seeming “correlations” between the dollar and “risk” assets that are no longer holding true. In fact, many were expecting that a rally in the USD would coincide with a decline in metals and the equity market. But, we have recently been witnessing a break within these correlations.

It is for this reason that I continually stress that each chart MUST be analyzed on its own, and it is faulty analysis to base a significant amount of your analysis of a particular chart purely on what another chart is doing. This leaves an analyst in a befuddled state when the seeming correlations disappear just as easily as they initially appeared. This is what is now happening to many in the financial world, as they scramble to figure out what is happening.

While it is still possible that the dollar may have further upside in the near term, I believe that the dollar is going to decline over the next month or two before beginning another strong rally.

In fact, the pattern we have laid out over the last several months has actually been followed by the market rather well. So, let’s see if this will continue.

As you can see from the 144 minute chart of the USD futures, the USD came within pennies of the ideal target level we have had on the chart for almost two months, and then strongly reversed on large selling volume.

Although the initial decline has not yet been confirmed with a completed 5 wave move to the downside, we expect that the USD will continue its decline to the 79.70 region, or possibly a little beyond that level. Since we view the USD as potentially in a wave 3 down within a larger corrective downside pattern, we know that wave i of wave 3 will usually target the .382 extension within that pattern (while strong markets target the .618 extension). The .382 extension is in the 79.70 region, which makes it a high probability target region at this point in time.

Clearly, any move back over last week’s top in the dollar would invalidate our current count on the USD, but that is not the expectation at this time. Rather, after the USD completes this downside thrust to the 79.70 region and then consolidates to the upside, our next larger target region would be the 77.44 region. The larger target for the USD would be the 76.00 region for the bottom of this wave 3.

For those that also see the possible Heads & Shoulders pattern in the USD, you can see that the left shoulder started in the region represented by the 1.382 extension for this move down in a wave 3, which is also our target for this decline in the USD.

So, for next week, we will expect more downside in the USD towards the 79.70 region, before an upside consolidation. However, any rally in the USD that takes it beyond last week’s market top would invalidate this count.

Originally published on ElliottWaveTrader.net.