US Dollar Index Analysis December 2014 (W,M,Y)
Created on Saturday, 29 November 2014 01:32
Written by Austin Galt
The US dollar has surged in recent months breaking some obvious resistance levels. This has brought out many calls for an even bigger move up. While this is possible, I suspect a big fake out move is in play. Let’s investigate.
Firstly, let’s begin with the yearly chart of the US dollar index to help put things in perspective.
US DOLLAR YEARLY CHART
This chart goes back 30 years and is evidence of a massive bear market in play with a pattern of lower lows and lower highs.
I have added some simple Elliott Wave annotations to provide some structure. The all time high was around 165 and I am viewing the 1992 low as the end of wave 1 and the 2001 high as the end of wave 2.
This implies we are in the midst of the destructive wave 3 which should see much more devastation in the value of the US dollar. Americans wanting to visit foreign countries may want to do so pronto before their currency makes it too expensive for them.
The previous major low was set in 2008 and six years later price has still not been able to take out the high price of the same year. This is an indication of weakness and is consistent with price action in a bear trend.
I have added Fibonacci retracement levels of the move down from the 2001 high to 2008 low and so far price has only been able to rally back to just under the 38.2% level. Price turning back down here will be further evidence of the strength of the bear trend.
I have added the Parabolic Stop and Reverse (PSAR) indicator which pertains to the dots. This is currently resistance with the dots overhead at 90.37. I expect this to hold this move up however there is a chance that price busts these dots in a little fake out move. How will we know whether it is a fake out move or not?
I have drawn a horizontal line denoting the previous major swing high set in 2005 at 92.53. Price breaking out above there will most likely mean that a more substantial move higher is playing out. While certainly possible I doubt that scenario.
The Stochastic indicator is trending up but already has a lower low in place and a potential lower high forming now will add credibility to the big bear trend.
The Bollinger Bands show price is hovering around the middle band which is a common place for price to turn back down. Price breaking above the previous major swing high would most likely see price head to the upper band.
Let’s move on to the monthly chart.
US DOLLAR MONTHLY CHART
I have drawn a black down-trending line across the highs of November 2005 and March 2009. Price has recently broken out above this trend line which has seen calls for an even bigger move up reach fever pitch. However, this trend line has been very obvious so I think it is suspect.
In fact, I believe the move above this trend line is a fake out move that will shortly see price turn back down and resume the overall downtrend. This can be seen in the green highlighted circle.
So where is this move higher likely to end?
I have drawn an Andrew’s Pitchfork with the upper pitchfork trend line originating from the March 2009 high at 89.71. I suspect price will top out around this level and essentially make a bearish double top with the trend.
Also, the 200 period moving average is just above the top pitchfork trend line and this should also act as resistance.
The Relative Strength Indicator (RSI) is in overbought territory so a pullback at the least could be expected shortly.
Also, the Moving Average Convergence Divergence (MACD) indicator shows the averages have diverged quite a lot so some regression to the mean in the form of a move down looks in order.
US DOLLAR WEEKLY CHART
I have added moving averages with time periods of 50 (blue), 100 (red) and 200 (black) and we can see they have been criss-crossing each other since early 2009. This is evidence of the massive consolidation that has been taking place in recent years.
The longer the consolidation takes, the bigger the next move will be. It appears as if we are now in the end game of this consolidation and price has moved to the upside.
Now keep in mind it is the market’s intention to try and deceive us at every turn and I believe we are smack bang in the middle of another great market deception.
Just imagine you are playing rugby and your opponent is running straight for you with ball in hand. At the last moment, as you are about to go in for the tackle, your opponent feigns to go right but steps off the right leg back on to the left leg and darts away down the left side.
This is what I think is happening with the US dollar index right now. Price is feigning to go up but this is the fake out move before it turns back down and darts away with the bulls left holding the bag and the bears in desperate pursuit as they try to get set.
I have added a Momentum indicator which shows this fake out move that I believe is in play. I have drawn both down-trending and up-trending lines which show the consolidation phase was running out of puff and nearing its end.
The first move above whichever trend line would be the fake out move before the market’s real intentions are revealed. If price busted the lower trend line first then a substantial move up could be expected. However, the first move has been to bust above the upper trend line so it is my opinion that the market’s real intention is to be a big move down. This is shown in the green highlighted circle.
And as always, time will be the judge.