Long-Term Structure Of The US Dollar Index

A lot of us are getting caught up in the recent strength… now weakness… in the US Dollar Index, but some may have forgotten the long term structure that overlays the current price movements.  Let’s take a look at the US Dollar Index from 1984 to present and try do determine an appropriate backdrop from which to characterize the most recent price action.

US Dollar Monthly Chart from 1984:

Despite a healthy move from 1995 to 2001, the US Dollar Index actually has been in a large scale downtrend from whence the data was available on this chart.  I didn’t classify every price swing, but one need only look at the larger structure to see the current up-move (and it was a big one) was a mere retracement against the prevailing, larger down-trend.

The moving averages are in the most bearish orientation possible, and price is currently failing to maintain support above these averages.  It will take further basing here - or further price appreciation - to change this powerful down-trend structure.

Let’s zoom the monthly chart into the period from 2000 to 2008, which roughly corresponded with the years of the Bush Administration.

US Dollar Monthly Chart from 2000:

Price peaked officially in 2001, though price attempted one more swing to the upside in early 2002, forming a sort of “Three Push” or triple-top pattern on a massive negative momentum divergence.  So began the sweeping downtrend we are experiencing to this day.

It is possible that we are either experiencing or completing Wave 4 of a larger down-Elliott Impulse, which would imply that eventually lower index values are yet to come.  I do want to note the new momentum high that set-up recently as price broke above the falling 50 month EMA - while bullish, price has failed to realize a new swing high, and the large-scale downtrend is still in full force with absolutely no sign of reversing (to reverse it, we would need to see price put in a higher high and a higher low and break above the 50 month EMA).

Price also has fallen short of the large scale 38.2% Fibonacci retracement of the 2000 peak to the 2008 lows, which stands at roughly $90.00.

I will say that price has met its objectives on the daily and weekly charts (in terms of prior support, Fibonacci levels, and EMA support).  There could be a short-term rally in store, but ultimately, no signs are pointing to renewed life yet on the larger monthly time frame.

By the way, a weaker Dollar is not necessarily bad across the board; in fact, a weaker dollar helps US Multinational corporations such as McDonald’s (MCD) and Caterpillar (CAT), as well as boosts commodity-based companies and commodity prices.  A weaker dollar can also boost tourism to the US as travelers from foreign countries take advantage of the relative strength of their home currency.  That being said, a weaker dollar hurts smaller companies and US tourists who travel outside the USA.

Continue to keep watching the US Dollar Index closely, as well as the other interrelated commodity markets for continued price clues as they develop.

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Comment by Mav

2009-03-02 13:51:57

Elliot Wave Theory is best served warmed over and after the fact because hindsight can tell you where the waves were. As a predictive tool before the fact, it can get you into hot water fast. I noticed in your Dollar presentation in Dec. ‘08 that you used a three way corrective pattern(ABC) with B in a lower position than the bottom of the first complex wave down(circled 1). It has always been my understanding that the corrective ABC wave cannot proceed lower than the bottom of wave 1. Therefore, point B is actually the bottom of complex Wave 1.

I’ve had some success using Elliot Wave Theory, but never enough to make it worth more than anything else. At the very best it is one more tool in the trader’s toolbox and it takes a full assortment of tools to analyze today’s markets. Good luck!

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