Saturday, 16 October 2010

13:05 BST - Dollar Update

On the daily chart of the dollar you can see how stretched the bullish count is becoming, with intermediate wave (2) now having retraced nearly 88.6% of the intermediate wave (1) rally:

Dollar Daily:

You can see from the indicators that there are bullish signs appearing - bullish divergence in the RSI which is failing to make lower lows with price; bullish divergence in the MACD histogram; the MACD itself starting to show signs of turning up; and the stochastic turning up. However, this is the type of thing we've seen before, but we now need price to confirm that something bullish may be afoot.

Well, we saw something along those lines yesterday. The bar yesterday was a nice reversal bar with potentially bullish implications since it took out the prior bar's low only to then close above the high of the prior bar. Its a start, but its not conclusive of a meaningful turn - the close was right at the bottom of an area of congestion (see the yellow highlighted area). If the dollar can get above that area and turn it into support, then there might be a more solid basis for thinking that a potentially significant turn has been made.

As mentioned above, we've nearly reached the 88.6% retracement level. I calculate that level to be 75.827, so there's still a little more room to go to reach it, though yesterday's low at 76.144 may be close enough. Just an observation: wave [2] on this bullish count was a 78.6% retracement of wave [1] and .886 is the square root of .786. It would be interesting if wave (2) of [3] stopped at the 88.6% retracement level.

The case for a turn would be reinforced if there were a a potentially complete wave count.

Well, there may be, but the most obvious count to me suggests that we may still need to see another low. Here's a 90 min chart showing the move down from the June high at 88.708:

Dollar 90 min:

The count places us currently in wave (iv) of [v] of C. If this is correct, Friday's rally will be limited and we should see a further decline next week to complete wave [v]. 

Here's a closer look from the B wave high at 83.522:

Dollar 70 min:

This provides a bit more detail for wave C of (2). Within wave [v] of C, I've got an extended wave (iii). This should mean that wave (v) of [v] is unlikely to extend and, in theory, should tend towards equality with wave (i) of [v]. Wave (i) of [v] was 1.071 points on my labelling, so if we start dropping again, without taking out Friday's high at 77.131, I'd be looking for signs of a turn in the 76.060 region.

Having said all of that, with Friday's action, its very possible that wave C completed at Friday's low. You can see the alternate count I've labelled for wave [v], shown in italics.

I'd start to think that this alternate labelling is playing out if we were to break above the area between the red horizontal lines, which is the yellow area of congestion marked on the daily chart above. This is, of course, provided that that area then becomes support.

Such a move would also get us above the 200 period moving average, which would also be supportive of a possible turn.

Still, looking at the 5 min chart, this is what I see from the low at 76.144:

Dollar 5 min:

Close up, the move from the low doesn't seem to be as impulsive as it may have felt if you were only watching price action and not the charts. It counts more naturally as a corrective move in my view, consistent with the main labelling in the 70 min chart above. However, I've sketched in a possible leading diagonal from the low that may have played out for the first wave of something more bullish. There's no overlap between what I see as the 1st and 4th waves, (they'd be where I have waves (1) and (4) of wave [C] on the corrective count) so I'd consider it doubtful. Still, if price breaks above the congestion I've referred to above and turns it into support, this leading diagonal count would start to look much more convincing.

So, as I've been emphasising over the last few weeks, the key remains price behaviour. Until we see price action that is undoubtedly impulsive to the upside, the safest course continues to be to assume more downside to come.

This is especially important because there remain more bearish counts in play. One of those is mentioned as item 2 on the Dollar page - that page is considerably out of date now, but the count mentioned in item 2 remains on the table (see the numbered items under the 75 min chart - item 1 in that list warned of much further downside than we had seen at that time in the count shown in the above charts).

A less bearish alternative, but one which, nevertheless, implies possibly more significant declines to come is shown in the following chart:

Dollar Daily - Alternate overall bullish count:

This puts us still in primary wave [2] of cycle c. The low of wave b is at 70.698. If this labelling is correct, and we're seeing an expanded flat wave [2], we could easily take out the low that's considered on the counts above to be wave [2] and which is wave (A) of [2] on this count, at 74.170. 

This count would likely be ruled out by a move above the low I've labelled as wave 1 of (C) at 80.085, assuming we move above that level in the next rally, since, on this labelling, the next rally would be wave 4 of (C).

So, in summary, I'm thinking we're likely to see more downside some time next week before we complete wave [v] of C of intermediate wave (2) on the main bullish count. If we move above the 77.931 level in an impulsive manner, I'll start to think that we may have bottomed at Friday's low of 76.144. However, we'd have to see that area turned into support to gain more confidence in this possibility. Bear in mind that on the more bearish counts, its possible that a rally from around these levels may only be a 4th wave in a larger 5 wave decline from the June high. Taking out the low at 80.085 would make that less likely on the alternate bullish count shown above, but we'd have to take out the high at 83.522 before I would start to think that the even more bearish count referred to above (that has the June high as a C wave and puts us now in a very large 5 wave move down) may not be viable.