Wave Analysis on USD’s Declining Pattern (by Avi Gilburt)

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The USD is still following the Elliott Wave script that we have laid out over the last several months. In fact, it has followed that pattern almost to the penny over these months.  Currently, most indications point to the USD continuing to follow this same pattern, targeting much lower levels in the months ahead.

Two weeks ago, I wrote the following:

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

At this time, I am going to explain that I think the USD will potentially inversely correlate to risks assets once again over the next several months.  While the correlations will never be an exact tick-for-tick correlation, it seems as though the USD is setting up to continue into the large decline we have been expecting, while the “risk” assets, specifically the equity markets and the precious metals,  seem to be setting up for a strong upside rally.

As for the current Elliott Wave count, you can see from the attached DX chart that the USD is in a confirmed downtrend.  I fact, the pattern is just about to embark on a very strong decline in a wave (3) within a wave iii of a larger wave 3.  This is potentially the strongest section of an Elliott Wave 5 wave structure.  So, it would seem that some news event will potentially be announced in the very near term which will seemingly have a very negative impact upon the USD. 

By the end of the month of April, my expectation would be that, based upon this current pattern, the DX will be targeting at least the 77.40 region, while it will definitely be within the realm of possibility to see the DX within the 76 region by the end of May, with the potential to be as low as the 75 region.

As we have mentioned for almost two months, since we saw the potential for this pattern setting up, there is a potential Heads & Shoulders pattern in the DX chart.  As you can see from the attached chart, the left shoulder started in the region represented by the 1.382 extension for this move down in a 3rd wave, which is also our next larger target for this decline in the USD over the next several months.  So, this clearly provides another means of support for our overall Elliott wave count.

However, the one technical issue that is causing me to be a bit more cautious regarding an imminent drop in the USD is the positive divergence exhibited in the MACD on the last low in the DX.  So, let’s keep our eyes on this at this time, but I would not want to see the DX move over the 79.53 level, or else we may have to reconsider the larger count.

Originally published on ElliottWaveTrader.net.