The bulls have been in control of DXY during most of 2018 and gradually conquered more land in the first months of 2019, as well. The USD index recovered from its February 2018 low of 88.25 to as high as 98.33 last month. The bulls can really be proud with the total gain of over 1000 pips they managed to achieve.
Unfortunately, “pride goes before a fall” and “no trend lasts forever“. After such a strong strike of gains complacency can start to settle in. This can often be dangerous, especially since evidence abounds that a major bearish reversal is near.
The daily chart above puts DXY ‘s price behavior from the top at 103.82 into Elliott Wave context. The first major reason not to join the bulls right now is the almost complete bearish 5-3 wave cycle. The decline to 88.25 can be seen as a five-wave impulse labeled 1-2-3-4-5. The sub-waves of waves 3 and 5 are also visible and since wave (iii) is extended we can recognize another impulse in its structure, as well.
DXY Bulls Cannot Hide Their Weakness Much Longer
The theory states that every impulse is followed by a correction of three waves in the opposite direction. Here, DXY seems to have drawn a textbook A-B-C zigzag correction with an ending diagonal in wave C. Once the corrective phase of the cycle is over, the larger trend resumes in the direction of the impulsive sequence.
The second reason not to trust the bulls is the fact that wave C is already knocking on the 61.8% Fibonacci level, where second waves often terminate. Wave (v) of C is likely going to make one last high before the bears return in wave (3/C) down.
And the third, but not less significant evidence supporting the bearish thesis is the strong negative divergence with the MACD. As visible, while DXY kept making new highs, the indicator reached its highest level in May 2018. This means the bulls have been slowly running out of power for the past year.
In conclusion, there is plenty of evidence that the bulls have been overstaying their welcome for a while now. If this analysis is correct, a notable bearish reversal can soon be expected in DXY. Given that wave (3/C)’s initial targets lie below the bottom of wave (1/A), we think this is definitely not the time for bravery.
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