Technically Speaking

The U.S Dollar Bear in Winter

Source: DTN ProphetX

As most of you know, I've been bearish the U.S. dollar/U.S. dollar index (USDX) for quite some time. Yes, I was even bearish BEFORE the USDX rallied to its high of 103.82 a year ago (January 2016).

Time for a detour. Writing that last sentence prompted me to go back and look to see if I blogged on the USDX last January, similar to this post. Sure enough, I did. Funny thing is, though, the move to its new high to start the new month/new year sent this U.S. dollar bear into hibernation, replacing it with a reluctant bull talking about outlandish high targets like 109.00. Of course that blog marked the high for the USDX as it collapsed into a 2-month bearish reversal on its monthly chart, sending it reeling into the downtrend we discuss today.

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Back to the present. September 2017 saw the USDX post a low of 91.01, a solid test of support at 91.17. This number marks the 38.2% retracement level of the previous major (long-term) uptrend from 70.70 (March 2008) through the January 2016 high. Given the sell-off over the course of the year showed little change in direction, I would be inclined to view the move as Wave A (first wave) of a standard 3-wave downtrend.

Wave B (second wave) was fast; so fast it looks to have peaked the next month (October 2016) at 95.15. Notice that this is a test of resistance between 94.03 and 95.90, the 23.6% and 38.2% retracement levels respectively of Wave A. After falling back in November and December the USDX looks to be in Wave C, meaning a new low should be in the offing during 2018. How low? With Wave A testing the 38.2% retracement level it would be logical to project Wave C to take out the Wave A low (91.01), possibly to the point of testing the 50% retracement level of 87.26.

However, and this is key given what happened in 2017, monthly stochastics are already below the oversold level of 20%. As we saw early last year when stochastics were being led by a series of bearish crossover above the overbought level of 80%, the USDX could see downside momentum start to wane in early 2018 given its already oversold status.

For now, though, this dollar bear will remain bearish, believing that Wave C will take the USDX to a new low. Stay tuned for updates as 2018 progresses.

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