Saturday, 26 June 2010

15:43 BST Dollar Update

The dollar is at a fairly important position right now, in my view: is it going to turn back up from current levels to confirm that its been in a 4th wave of some degree (as in options 1A, 2A and B and 3 of the counts I'm following - see the counts and the charts on the dollar page), or is it going to decline further in a continuation of an intermediate wave (2)?

Obviously, I don't know the answer - sorry! - I can only look at the evidence as displayed in the charts.

This is one of the charts on the dollar page which I've updated for the close on 25 June:

Dollar Daily chart:

You can see why I think it is at an important level - there is price support which is also the area of a prior 4th wave and its at the 38.2% retracement of wave [iii], as well as being in the area of the 50 day ma. Its just broken down out of the elliott channel, but if I were to draw in the base channel by connecting the low of wave [ii] to the low of wave 2 and placing a parallel line over wave 1, price is currently at the mid line of that channel - a point at which a 4th wave often ends if it fails to stop at the bottom of the elliott channel.

In addition, you can see the support line I've drawn under the RSI. This indicator has found support at its current level on each of the important pullbacks in price during this uptrend.  The MACD histogram is making higher lows and there is in fact a subtle bullish divergence in that the lowest low of the histogram came on 18 June. Friday's histogram bar (though slightly lower than the previous day) is higher than the bar of that day yet price closed lower than it did on 18 June. So, a lower close in price, than on 18 June, but no lower low in the histogram.

All of these points would suggest that the odds favour a reversal back up very soon, perhaps confirming one of the 4th wave counts.

So what else? Well there's those ichimoku charts that I like looking at. Here's the daily chart:

Dollar Daily ichimoku:

You can see that there are some bearish signs appearing on this chart, yet there are also reasons why price could well turn back up from around here.

The bearish signs are that the turning line (blue) has crossed below the standard line (red) and price is below both. Also, the lagging line has just slipped below the price line. These features I would take as warning signs of a potential trend change.

However, On the plus side, price is very close to the cloud which, as well as being an indication of the trend, also acts as support and resistance. Its more obvious than in most other forms of charting, but clearly, that support or resistance is an area, not a specific price point, so price could slip into the cloud and even down through it yet still reverse and continue the larger uptrend. (you can see that happened in Decmber 2008). 

I've mentioned previously, that I watch the behaviour of the lagging line most closely. Look at that action in December 2008 when price declined through the bottom of the cloud (and the turning line fell below the standard line and price was below both). You can see that the lagging line also dropped (remember, you have to compare the lagging line 26 periods back from price). The lagging line stopped on the top of the cloud, ie it found support on the cloud, even though price did not. That's the point at which price reversed back up.

Currently, the lagging line is close to the turning line. In trends, the turning line can also provide support or resistance. I've highlighted on the chart the occasions when during the downtrend from March to December 2009, the lagging line found resistance at the turning line and those occasions when it has found support there during the uptrend. 

Then there is the weekly ichimoku chart:

Dollar Weekly ichimoku:

This is currently painting a pretty bullish picture with all of the components of the chart in a buliish configuration. 

The decline in price looks, at the moment, like its coming back to the turning line, as it would do with a conventional moving average when it strays too far from it (except in runaway trends, of course). So nothing to cause concern here so far. The turning line should provide support to price - another reason to think we might get a reversal back up in the dollar fairly soon.

The chart also explains why price pulled back from the 7 June highs, in both conventional TA terms as well as in ichimoku charting terms.

None of this will preclude a drastic fall in price which takes the lagging line with it, after all, all trends have to end or are suspended temporarily. However, these ichimoku charts, coupled with the points I've made above with regard to the more conventional TA, suggest reasons to think that the dollar could turn back up from around these levels.

So finally, here's the elliott waves on a 60 min chart:

Dollar 60 min chart:

I've labelled it in accordance with the daily chart shown above, which is my favoured count at the moment (the other counts are on the dollar page).

I've labelled a complete wave [iv] on 20 June, followed by waves (i) and (ii) of [v]. You can see that there's not much more room for wave (ii) to drop - its at the 78.6% retracement level. Its possible to count the c wave of (ii) complete or very nearly complete on Friday (you can just about make out 5 waves on this timeframe, but on a smaller timeframe, it probably needs another small push down).

The alternative is that we're into a second zig zag (where I have wave (i) up would be wave (x)) or (as marked on the chart) the (c) leg of a larger single zig zag.

So, the elliott wave count could have us at a point where wave [v] of minor 3 is about to start. If you were to trade to the long side now, the risk would be fairly limited (you'd know you were on the wrong side if the low marked [iv] is taken out), provided we don't just gap down on Sunday night.  

However, there are more bearish possibilities too, so with reference to the wave count, its not possible to say that the decline is over.  Its the techincals referred to above that hint at an end now or soon to the downward move since 7 June.  However, clearly, we need to be prepared for more downside - was the rally from the 21 June low just a kiss goodbye to the elliott channel, or will it double bottom and turn back up? If we do get more downside, we'll have to review the wave count and the technicals to see what they tells us at that stage.

11:36 BST - Dollar page updated

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