2018 did not start well for the U.S. dollar, which fell against most of its rivals such as the Euro and the Japanese yen. As a result, the dollar index (DXY) did not shine as well. It fell to as low as 88.25 by mid-February before recovering to 90.23 a week later. The question we have to ask is what does this recent recovery represent? Is it just a minor rally within the ongoing downtrend or the beginning of a bigger upswing? In order to find out we need to take a look at the dollar index’ entire decline from the 103.82 high in January, 2017, through the lens of the Elliott Wave Principle.
The daily price chart of the USD index reveals that the drop from 103.82 to 88.25 takes the shape of a five-wave impulse, labeled 1-2-3-4-5. The sub-waves of waves 3 and 5 are also clearly visible, and since wave 3 is the extended wave in the sequence, the impulsive structure of wave (iii) of 3 is easy to label as i-ii-iii-iv-v, too.
What does this mean? According to the theory, every impulse is followed by a three-wave correction in the opposite direction. Here, we have an impulsive decline to the south, which comes to tell us that a three-wave recovery of the same degree should be expected. To achieve a respectable retracement, the bulls have to be able to lift the dollar index at least back up to the resistance area near wave 4. In terms of price, the 95.00 level is there for the taking from now on.
Once there, however, the 5-3 wave cycle would be complete. The trend should then be expected to resume in the direction of the five-wave pattern. Instead of joining the bulls near 95.00, traders should watch out for a bearish reversal and the start of wave (3/C) down, whose targets lie beneath the 88.00 mark.
In conclusion, 2018 did not start in the best way possible for dollar bulls, but if this count is correct, the next few months would allow them to take a breather, before the bears return.