The US dollar starts a big recovery

All markets centre around the US dollar – the global reserve currency. That is why every trader/investor must be aware of its direction.

For investors, most large companies do business globally and they earn revenue mostly in dollars that are usually translated back into their home currency before dividends can be paid out – and their stock value can be assessed.

For traders, a big move in the dollar usually has major repercussions in short to medium term moves in gold, silver, copper, bonds, currencies (of course) and crude oil.

Here is the 15-year weekly chart showing the huge swings in its value from the 2001 high at 120 to the 72 low in 2008 at the end of the credit crunch:

There is a lovely wedge which is a pattern I am always searching for in charts of all time frames because they are so reliable in letting me predict the direction of the next big move. That move up out of it in 2014 was a doozy of a buy signal – and we took full advantage with short trades in EUR/USD and GBP/USD.

But today is today and where are we in the wave pattern? Here is a close up of the above chart:

The sharp rally out the wedge was a third wave, which was apparent at the time because it was so long and strong. But since early last year, the dollar has been in a massive consolidation phase. This is typical behaviour following a mighty move.

Note that wave 3 ended at the very round number 100 level.

Incidentally, that dollar rally went totally against prevailing opinion – which is precisely the situation today with hedge funds holding a record net short dollar futures (COT data). This is a clue to the next major direction, of course.

The 15-month long wave 4 is a typical A-B-C which took it to the Fibonacci 38% support level.

And here is recent action on the hourly:

The spike low last month was likely my wave 4 low and we should now be in the final wave 5 up, but it must first punch through the resistance zone just ahead.

It is possible to trade the Dollar Index on most if not all platforms, but I prefer to trade its proxy, EUR/USD. Here is my updated chart showing my well-established blue tramlines and Elliott waves:

In a recent blog, I noted the overshoot at 1.16 of my reliable lower tramline and noted that this overshoot was likely heralding a major turn down, which seems to be occurring. The presence of an overshoot often leads to a rapid move away from the spike.

This morning, the market is testing minor support at the 1.13 area which I expect to give way. Note the momentum divergence going into the overshoot.