Analyzing the markets is like detective work, search for evidence and determine a conclusion. The US dollar is giving many clues not only to the longer term direction, but also to a possible important bottom forming right now.
Long Term Evidence
Sometimes clues can be found with something as simple as a ruler. Please examine the US Dollar (DX) chart in Figure 1.
Note that the long-term declining trend line connecting the peaks made in 1985 and 2001 has been broken. This is a very important piece of evidence considering that the declining trend line covers a multi decade time period. The break above the line implies several more years of a US dollar bull market. Also note the DX decline from the March 2015 peak has so far found support at the trend line.
Now let’s narrow the focus to the last five years. Please examine the PowerShares DB US Dollar Index Bullish (UUP) weekly chart in Figure 2.
Note that the Relative Strength Index or RSI hit a high of 86.72 which corresponds with the five-year UUP high made in March 2015. The RSI is a momentum indicator that is used to determine overbought and oversold conditions. Any reading over 70 is considered overbought, readings below 30 are oversold.
The RSI is a terrific indicator and there are many ways it can be utilized. One very important aspect of the RSI is that major trend changes almost always require at least one bullish or bearish divergence. Using the recent UUP March peak as an example, the price peak corresponded with the RSI high of 86.72.
To have a bearish divergence the UUP would have to rally to above the March peak of 26.50 with an RSI reading below 86.72.
The March 2015 RSI reading of 86.72 is the highest this indicator has been since the major UUP bottom made in 2011. The rally from the intermediate bottom made in 2014 took ten months and brought the RSI deep into overbought territory. This created a situation in which the UUP needed to decline at least a few months to relieve the extreme overbought condition. The recent two month decline has brought the RSI to the neutral zone area of 50.00 – the UUP could now be in position to begin the next leg of the bull market, possibly going far above the March 2015 26.50 pinnacle.
Now let’s shift our focus to the UUP activity since the intermediate bottom made on May 6th, 2014. Please examine the UUP daily chart in Figure.3
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The UUP rally from May 2014 to March 2015 was smooth and steady, the signature of an impulsive Elliott wave. Impulsive waves subdivide into five waves and always move in the same direction as the trend of one larger degree.
The subsequent decline from March 2015 also gives clues that UUP is still in a bull market. The March to May decline so far is three waves down. The basic Elliott wave bullish form is five waves up followed by three waves down. Even the depth of the March to May drop gives a clue that the March 13th, 2015 top was a “third wave” up of a larger five wave pattern. Typically, wave “two” corrections are deep, anywhere from 61.8% to 99% of the prior wave “one”. Wave “four” corrections are shallow, usually between 23.6% to 38.2% of the prior wave “three” rally.
The May 2014 to March 2015 rally was 5.36 points multiplied by .382 equals 2.04.
The March 2015 peak of 26.50 minus 2.04 targets 24.46 the actual bottom May 15th was 24.47 a bulls eye hit!
It is possible that the wave “four” correction could still be under construction. The decline that ended on May 15th is an Elliott wave single Zigzag. Sometimes this pattern can extend into a double Zigzag; where the first Zigzag completes, followed by an intervening wave, referred to as an “X” wave, then finishing with a second Zigzag.
A clue that this process could be underway comes from a fascinating Fibonacci time ratio.
June 17th is the second day of the FOMC meeting, a day notorious for volatility and market turns. The May 6, 2014 bottom to June 17, 2015 is 407 days. The March 13, 2015 peak to June 17, 2015 is 96 days. Divide 96 by 407 equals .235 almost exactly the Fibonacci ratio of .236 amazing!
Plan of Action
Near term if UUP is still in a decline it will probably make only a marginal new low below 24.47. Regardless of any further near term decline, UUP should be bought now. The combination of a long-term declining trend line break, Elliott wave formation and Fibonacci support level present a favorable risk to reward ratio.
If a US dollar bull market is in effect- the minimum upside target is the DX 2001 peak near the 120 level, about a 26% increase from current levels. Approximately 31.10 on the UUP.
Place the stop sell order for UUP at 23.50, this is just below the maximum level of decline for a possible double Zigzag formation.
If the US dollar bull market continues, there will be a fundamental reason behind the move. Unfortunately, it will come too late for a low risk entry. Opportunity is knocking now. Heed the call.