The dollar has been slapped around for quite a while now.  There are signals which suggests a trend change is in the making which will have a profound effect on commodity prices and markets.

In early March a wolfewave pattern gave rise to a topping pattern in the dollar index.  Now there is a clear positive divergence (lower prices, higher momentum) which was confirmed in Friday’s trading session.  The larger structure suggests that an Elliott 5-wave pattern has completed, and in the weekly timeframe there is pocket support and the presence of a large A-B-C structure.

Crude Awakening

Crude oil drives both political and psychological markets.  It is now against pocket resistance on the daily charts at 72.  This swing trade will be very profitable on a move back to the lower 60′s to form some type of channel or symmetrical triangle pattern.  Pocket support will be around 62-63.

This is a multi-year pattern developing in the dollar – a cup & handle, or inverse head & shoulders.  The key to this setup is symmetry – notice how each pullback this past year corresponds with low marks in the years 2004-2005.  Much like the yen surprised every trader banking on a cheap source of fund borrowing, so too the dollar is in the beginning stages of a  move higher, especially if there is a breakout above the rim now clearly defined around 90.  This area of ‘pocket resistance’ is a key pivot in the months ahead.

US Dollar index update – the setup which was first flagged on March 3 as the dollar was retesting its 2008 spike highs has indeed produced a clean pullback.  It is now approaching target levels – and as expected, dollar-denominated equities / stocks / commodities have lifted nicely in response to movements in the foreign exchange markets.  With the Fed action expected today, I believe that the target levels will be met around 85-86.  In the larger context, this will be an inverse head & shoulders pattern in the making.  A day to book profits in short dollar positions (long EUR AUD) after the Fed announcement in any late surge.

7:00pm update – Wow.  The Fed announcement that they would be buying up to $300 billion in long-term goverment bonds sends the dolllar into a hard tail spin, ending much lower than the projected wolfewave target.  At this juncture, it has pulled back exactly 59% of the previous swing high on the daily chart.  Interestingly enough, this is the same percentage at which the swing low was recorded on the weekly chart in mid-December retracement.

A follow-up to the March 12 setup – markets have now retraced to the January spike lows around 800.  The Advanced GET software is suggesting that a 5-wave advance has completed on the hourly charts.

Is this perhaps a manifestation of the positive divergence noted into the close yesterday on the hourly charts?

3:30pm update – small a-b-c completes an hourly bear flag.  Testing lower bounds of the pattern setup (a confirmation zone / make-or-break level) here.

The dollar is retesting the 2008 highs.  Although it will likely go higher, an equity rally will undoubtedly be triggered first by a pullback in the greenback.  Pay close attention to this index as it test the highs.

Yen update – The previous head & shoulders pattern has evolved into a double top setup. Once again a place to tighten stops as this pattern approaches to target measurement.  This will also constitute a 62% retrace from the daily swing high and represents a multi-year breakout pivot at 0.98 that should provide very strong support.

1:45pm update – early setup for measured move target by Buffy is called at 10am. Target is tagged at the beginning of PM session.

2:00pm profit taking level – pattern traders will also recognize the gartley on larger timescale and definitely ring the cash register here.

3:00pm – just a quick note to remark on the correlation of a short USD (US dollar) position to equity markets.  Showing the EUR/USD cross.

11:30am update – pattern targets are met.  Note the lack of overnight globex futures quotes, therefore inflection points 3-4 are invisible in this chart.

2:30pm update – ES has a second lift and consolidation sequence.

5:30pm recap

The Japanese yen has shown a lot of strength, however, at this juncture a ‘pocket trade’ is asserting itself.  At a smaller scale, a head & shoulders pattern is also visible, which should take it back to a retest of the 1.06 level.  This is a short candidate in any cross trade for the next week or so.

I also realized that the currencies futures are better served by using the continuous contract symbols, since they will illustrate overnight and intraday prices ranges more clearly.  Below is an example of the yen continuous contract (J6H9 compared to above JYH9) and the improved detail.

The dollar is now facing a similar technical level as it retests the DXY 87-88 level.  The Japanese yen is in a similar situation as it tests the 1.13 pocket on a daily basis.  In this endless cycle of competitive currency devaluation, we are now approaching a juncture where foreign exchange traders can short dollars and yen.  As far as equities are concerned, this should produce a lift as a weaker currency is deemed to be advantageous for corporations.

Currency devaluation produce effects on nominal prices.  In order to keep things equal, devaluation will produce a perceived higher price for the same goods.  In June 2001, the dollar index topped around 120, only to fall precipitously to around 72 by July 2007.  The net effect is that gasoline skyrocketed along with other commodity prices.  As the dollar strengthened last summer, the CRB (Commodity Resource Board) index headed the other direction and produced a significant top.  The same can be said for the Dow Jones Industrial Average which peaked a few months later around 14,000.

It benefits the trader to keep an eye on the foreign exchange market, since it is the means of producing stealth price adjustments.  A currency devaluation is an easy means to entice the public into believing that prices are going up, yet what is really happening is that your buying power is diminished.  Looking back at the Dow Jones in 2000, it appears as if the 11,215 peak was shattered in 2007, yet in dollar-adjusted terms, a 62% (Fibonacci fans rejoice) retrace was completed.