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The U.S. Dollar Is Setting The Stage To Be The Big Story Of 2018

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Includes: UDN, USDU, UUP
by: Gordon Long
Gordon Long
Long/short equity, value, research analyst
Summary

The US Dollar has been operating within two controlling technical ellipses for 3 decades, with 3 of the most extremely volatile years remaining.

The US Dollar has recently broken Intermediate Support in a downward trend, which when it completes will lead to a violent upward move in the US Dollar.

Short term the US Dollar will likely consolidate upward before completing a final wave downward within the current down trend.

Long Term Perspective

We have tracked and had confirmed for a number of years now the long term perspective for the US dollar chart as illustrated here:

The two large ellipses are identical, with the ellipse on the right, being a mirror of the ellipse on the left, shifted to the right and moved down slightly.

We had been watching closely for a potential break of the horizontal middle blue dashed support/resistance (s/r) that is inside the expanding wedge structure shown on the right (in blue), starting in 2015. Below is an expansion of this area of the chart updated to reflect recent price action.

This wedge had controlled USD price action since 2015. Our analysis indicated that a break of the s/r would confirm a move towards the lower support of the blue wedge, red channel, and outer ellipse band.

The USD has dropped to a previous s/r level (black), the red dashed s/r (middle of the red channel), and then bounced. This could be the bottom for the dollar, however there are some technical considerations that suggest the current bounce is just part of a corrective or normal market retracement in a downward trend and that there is still another potential drop to go.

Since the lift going into 2015, MATASII has been waiting for the US dollar to move downwards to touch the ellipse's outer band - this continues to be what we are watching for. it is important to understand that the "touch" does not necessarily have to be lower than the current market. If we study the recent down leg since 2016, using Elliott Wave Principle, the theory suggests another potential downward wave is still to come (the 5th).

The chart below is a 'zoomed-in' view of the current market location with numerical Elliott Wave labeling. The bounce we are in could be seen as the 4th corrective, with still another wave (the 5th) down to go.

USD Weekly

The weekly view (below) illustrates the blue corrective wedge the market has been in since the lift in 2015.

The structure and other technicals suggest we could see a further US$ bounce/lift with a retest of the red channels top s/r. Also of note in the area is the falling 34 MA (pink) and the wedge pattern's top resistance. If wave 4 lifts somewhere in here, it would also fit EW's theory of alternation (from wave 2). IF the EW count is somewhat correct, we could then expect to see another drop, possibly severe, similar to the drop experienced in wave 3.

There are a couple of likely or potential targets to look for wave 5 to end up:

  • One continues the current down trend and breaks lower than the larger blue expanding wedge to touch the ellipse;
  • The second touches the larger blue expanding wedge and the ellipse at the same time.
  • Note the slightly curved blue line seen in the bottom right corner of the chart, cutting through the potential 5? targets, is the edge of the large blue ellipse from the previous charts.

IF the EW count is incorrect, or fails (as all technicals can), then we may already have the bottom of the market. This is not my bias, however we need to account for the possibility. With respect to EW theory, the market could technically go back as high as the lows of wave 1 and still be a valid count. This would allow a large lift from the market (potentially back to $98.85) and then the 5th drop. However, if we see the market lift past the technicals noted around 4?, then we need to start to consider the possibility of more than just a correction occurring.

There is the middle blue dashed s/r of the large blue wedge structure as well as two blue weekly s/r zones that can be used as guides if the market starts to lift back to the top of the larger blue wedge pattern (to make new highs).

Daily View

The longer term perspectives suggest we could see more lift from the USD in to 4? somewhere. The daily offers more perspectives, including an alternative to more lift. IF we don't see the lift to 4?, we could see the 4th wave unfold a little more sideways. The blue s/r zone (just bounced from), current green channel from the recent drop (just bounced off), and the UBB's all need to moved over for more lift to occur. If these hold we could see a potential sideways ABC unfold (marked in green), where the red dashed s/r and the blue s/r zone become wave 4's boundaries. Wave 4 would end at the blue s/r zone and we could still see another good drop for wave 5.

MACRO BIAS

Note our proprietary MACRO BIAS (colored 'pyramids' at the bottom of the charts) to give the technicals some context. The MACRO BIAS appears to support a consolidation (neutral R-S), and then a lift in S-T. The 5th wave drop, although could be quick and significant, relative to the drop since the start of this year could fall in to the larger picture as part of the neutral. Remember that these zones are not absolute and reflect an overall general market pressure that is expected to occur.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.