The U.S. dollar index fell less than two pips short of the 97.00 mark on August 15th. 96.98 was the best the bulls managed to achieve before the bears showed up to drag DXY to as low as 94.69 so far. On the other hand, the USD index has been steadily advancing since mid-February, when it found a bottom at 88.25. What does the decent weakness stand for then? Is it a buy-the-dip opportunity or the beginning of a bigger pullback? The chart below might disappoint those traders, who are hoping it is the former.
In order to find out what the current plunge means, we need to see where does it fit into the bigger Elliott Wave picture. The daily chart reveals that the dollar index’ rally from 88.25 to the vicinity of 97.00 has the shape of a five-wave impulse, labeled 1-2-3-4-5. The third wave – 3 – is extended and its sub-waves are also clearly visible, while wave 4 looks like a triangle correction. Triangles precede the last wave of the larger sequence, so it is no surprise that a bearish reversal followed, once wave 5 ran out of steam.
According to the theory, a three-wave correction occurs after every impulse pattern. This means the drop from 96.98 is the start of a bigger retracement in wave B, which is still far from over. The market can choose to draw a flat correction or even a triangle in wave B, but a zigzag is the most probable choice and that is the correction shown above.
The first major support is located between 93.50 and 93.00. That is where wave “a” of B can be expected to end and wave “b” up towards 95.50 – 96.00 to begin. Once wave “b” is over, another selloff in wave “c” should drag the index to a new low and complete wave B. In any case, as long as the dollar index trades below 96.98, the bears remain in the driving seat.
Did you like this analysis? You can learn to do it yourself with our Elliott Wave Video Course!