Saturday, April 30, 2011

US Dollar Approaching Critical Juncture

The US dollar is approaching a critical juncture. Bearish sentiment on the dollar is very strong, and many are already pronouncing the dollar's demise. The decline of the dollar has been in the news for several weeks.

Generally, when there is extreme bearishness or extreme bullishness in play, a major trend change is around the corner. In the last two low points, one in 2008 and another in late 2009, there was extreme bearishness on the dollar. In both cases, the dollar rallied. There is every reason to believe that the dollar is going to rally this time around as well.

Now for some charts on the US Dollar Index. Here is a chart of 2008 - 2011:

The low point in 2008 is off the chart. Since the low point, a quick rally lasting 8 months unfolded, followed by a flat that has taken 2 years to unfold so far. The 8 month advance is best characterized as a Primary degree advance when considered in the context of the larger picture. The large flat that is still unfolding can reasonably be characterized as a Primary degree correction.

1 -- The advance from March 2008 to Nov 2008 would be Primary wave [1]. 8 months is quite brief for a Primary degree advance within a bull market. A Primary degree bull market advance would generally last around 6 years (as a guideline). Within the larger picture, this labeling works best.

2 -- The large flat that has been unfolding would be Primary wave [2]. 2 years is a reasonable amount of time for a Primary degree correction. Within the flat, Intermediate wave (A) unfolded as an expanded flat, Intermediate wave (B) unfolded as a zigzag, and Intermediate wave (C) is unfolding as an ending diagonal.

Here's a chart showing Minor wave 5 of Intermediate wave (C) in detail.

First of all, the chart shows how close the US Dollar is to a critical juncture. Within Minor wave 5 down, three waves have already unfolded with Minute wave [iii] just now completed. The final low of Primary wave [2] is indicated by the target box on the chart, with a downside target of 72.0 to 72.75 sometime in May 2011.

It's more than a coincidence that the US Dollar is approaching a critical juncture at the same time that the stock market is. The commodity markets are also approaching a critical juncture next month as well. The common denominator of all the markets reaching a critical juncture at virtually the same time is "The Great Deflation" which will no doubt kick into high gear upon the next leg down in the markets. One of the consequences of "The Great Deflation" is a bull market in the US dollar.

Projecting the future wave path of the US Dollar Index is fairly straightforward. Since Primary wave [2] is a deep retrace of Primary wave [1], we should expect Primary wave [3] to be 2.618 times the length of Primary wave [1]. This puts the target at around 120. Continuing with the "all the same market" theme, Primary wave [3] up in the dollar will unfold at the same time that Primary wave [3] down is unfolding in the stock market. This helps build the case that Primary wave [3] down in the stock market will last 55 - 60 months with the low point around April 2016.

Primary wave [4] down in the US Dollar Index should last around a year and is very likely to unfold as a zigzag. Primary wave [5] would start in 2017 and continue through 2021, lasting 55 months. The upside target for the end of Cycle wave I is 180. 13 years is definitely a reasonable amount of time for a Cycle degree advance. This helps build the case for "The Great Deflation" ending in 2021.

Here's the chart showing the projected wave path of the US Dollar Index.

The projected wave path of the US Dollar Index paints a picture of "The Great Deflation" unfolding with increasing momentum over time.

From the 1700s, the dollar went into a downtrend that continued until 2008. This decline is best labeled as Millennium wave ((2)). The decline unfolded as a triple zigzag with an ending diagonal unfolding from 1976 to 2008. The projected wave path of Cycle wave I would accomplish another guideline, namely, the ending diagonal would ideally be retraced in 10 - 15 years.

There is every reason to be bullish on the US dollar.

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