The USD Index started its spectacular rally from 78.90 in May. In the beginning of October it almost reached 87.00, but the bulls decided to take a rest and prices fell down to 84.50. The important question is how does this two-and-a-half-figures decline fit into the Elliott Wave count? Searching for the answer, we will examine a daily chart of the USD Index, which could help us come up with an idea.
The chart suggests, that the drop-off from 86.86 is a natural wave 4 correction of the previous extended third wave. This assumption is supported by the so-called “rule of alternation”, which is only a guideline actually. It states that the two corrective waves – 2 and 4 – tend to be of different type. For example, if wave 2 is a sharp zig-zag retracement, wave 4 would move sideways, probably in the form of a flat or a triangle. The price action of the US dollar index shows a flat second wave and a sharp zig-zag in wave four. If this is the correct count, we should expect another rally to take prices higher, probably above the 87.00 mark. If this happens, we will have a complete five-wave impulse, which, according to the theory, should be followed by a three-wave decline.
