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USD Index Bears Could Still Breach 91.00, But…

It has been a while since our last update on the USD index. On December 13th, 2016, while the index was hovering around the 101.00 mark, the Elliott Wave Principle suggested the uptrend is approaching its end and the Dollar index “will not rise forever”. So, instead of joining the bulls, who have been in control for over five years, since May 2011, we decided to trust the chart below and stay aside.
usd index elliott wave analysis
The reason for out pessimism was the structure of the rally from 72.83, which took the shape of a textbook five-wave impulse, whose fifth wave – (5) – had already exceeded the top of wave (3) and was therefore supposed to complete the entire pattern soon. According to the theory, every impulse is followed by a three-wave correction in the opposite direction. As if that was not enough, the relative strength index revealed an obvious bearish divergence between waves (5) and (3). Less than a year later, here is how the weekly chart of the USD index looks today.

usd index elliott wave analysis weekly update

The best the bulls were able to achieve was 103.81 on January 3rd, 2017. From then on, the bears took the wheel and dragged the index to as low as 91.01 by September 8th. However, in the last couple of weeks we witnessed a recovery to 93.89 as of today. Is it just a correction within the downtrend or the beginning of a much larger rally? To answer this question, we need to dig deeper into the wave structure and take a look at the daily chart of the USD index.

usd index elliott wave analysis daily

Since the primary count indicated that wave (5) ended at 103.81, the most probable short-term scenario suggests the following weakness should evolve into a five-wave impulse to the downside. So far, this is not the case, because the absence of a couple of fifth waves does not allow us to count the entire selloff as an impulsive pattern. However, this only means the impulse is probably still developing and the missing waves would eventually materialize. If that is the case, we should expect waves (v) of 3/c, wave 4 and wave 5 to finally breach 91.00. The fact that wave (iv) still consists of only three waves and has already reached the resistance area of previous fourth waves only reinforces the negative outlook. According to this count, the bears are still in charge for wave 3/c, because even if waves 4 and 5 never occur, wave (v) of 3/c still needs to develop. Which brings us to the following question: what happens if waves 4 and 5 never develop? Two possibilities exist. First, the corrective decline from 103.81 is going to be a double zig-zag labeled W-X-Y, which will not change the weekly count much, or second, and much more interesting, an expanding triangle has been in progress. Let’s take a look at the second option.
usd index elliott wave analysis alternative
It is true that the rally from 91.91 to 103.81, which was labeled as wave (5), does not have the best impulsive structure possible and it does not look like an ending diagonal, either. That is why we cannot neglect the possibility that it was actually wave D of (4), which is still in progress as an expanding triangle correction, whose wave E down is now searching for a bottom, in order to give the start of wave (5) up. In addition, the 38.2% Fibonacci level also coincides wit the lower line of the triangle, thus forming a support cluster in that area.

The purpose of this article was the same as the purpose of the previous one. Just like the USD index did not rise forever, it is not going to decline forever, as well. In the short-term 91.00 is likely going to be breached, but from then on the bears are not going to make progress so easily, if at all.

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