US Dollar starts another strong bull trend

US Dollar starts another strong bull trend


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I have been steadfastly bullish the dollar for many months.  That is not to deny the often large bull market dips along the way!  For a trader, it is essential to have some idea of the time frame you wish to work within.  For the counter-trend bull market dips, it is always a good tactic to either trade it with one eye on the exit door or simply dismiss that trade and just keep your longer-term bull positions.

This principle was well illustrated last week (more later).

And when trading currencies, I keep in the back of my mind that major five-wave trends are very often long and strong, especially in third waves – and fifth waves are likewise often extended and can exceed third waves in height and duration.

That makes the strategy of holding a currency trade for the long pull especially attractive.  But you must be prepared for the inevitable setbacks along the way.

For perspective, here is the monthly chart going back to the 120 highs in 2002

The huge bear decline off that high is in a clear five down.  Imagine holding a short from near that high and holding all the way down to either the wave 3 low in 2005 or to the ultimate wave 5 low at 70 in 2008!  I wonder how many managed that – not too many I would guess, but what a home run!

As traders, we are asking – can a similar home run be in prospect today?

If you were around in 2014 when I started getting very interested in the hugely bullish implications of the large wedge forming, you could easily has spotted a chance to go long at around the 82 area on the upper wedge line breakout.

And with that breakout in September of that year, I was then able to place reliable Elliott wave labels on the chart.  The red wave 5 low in 2008 was made on a large momentum divergence which heralded a likely strong reversal – and that came with a quick run-up in purple wave 1.

But then the market entered a volatile period for several years (but with large profitable swings) and formed the lovely wedge.

And the breakout heralded the rocket in red wave 3 to its high last year and since then has formed an A-B-C three down in wave 4 which ended in May.  Then the market has embarked on the final red wave 5 (and purple wave 3).  Note that red wave 4 has centred around the classic Fib 50% resistance level.

The next target then is the Fib 62% surrounding the 102 level.  But because red wave 3 overshot the ‘ideal’ Fib 50% target by several full points, I expect the same to apply here.

So the long-term picture is bullish and will only change if the market can decline beneath the wave 4 low at the 92 level (currently 96).

Indeed, from a risk/reward perspective, taking a long trade anywhere here with a four full point risk and if my main target at the 120 level (previous 2002 high) is achieved, that will result in a reward/risk ratio of six – not bad.  But can we do better with a more closely timed entry to reduce the risk?

As all spread betters know full well, it is extremely dangerous to jump into a trade just when you feel like it.  Timing entries is crucial.

Here is the shorter term daily picture:

The rally off the red wave 4 low is a series of 1-2s – and has formed a lovely five-wave continuation (see text, pp 38 – 39, 144 – 145).

If this is correct, the market is in third waves of at least three degrees of scale – a most bullish setup.

But the best low-risk entries were at the red wave 2 lows as the decline hit the Fibonacci 62% retrace and met the lower blue tramline where major support was located.  An entry from now on carries much higher risk of being stopped out of course.

But does the sentiment picture support this bullish outlook? Ideally, we need to see a clear level of dollar bearishness, or at least a change towards a more bearish dollar stance. As a proxy, here is the COT for EUR/USD which moves inversely with the dollar index:

Both hedge funds (non-commercials) and the small trader have kept a large short position for many weeks, while the commercials (smart money) have taken the opposite side.  But last week, hedgies reduced their short positions and the commercials increased theirs.  And on Friday, EUR/USD declined right on cue!

As EUR/USD declines, I expect a swing out of shorts into longs and will monitor the COT weekly.

Have I resolved my Dow Dilemma?

This was my post of last Tuesday where I had two competing valid outcomes and today, I believe one of them is nosing slightly  in front.

Here is the short-term picture

If we do have the a-b-c pattern in play (forecasting a rally phase), then the waves up from wave c low is a series of 1-2s (similar to the dollar picture above) within a wedge.  Ideally, I need to see a dip this week (Fed-inspired on Wednesday?) and then a huge rally out of wedge.

Does the sentiment picture support this outcome?  Here is latest COT of the e-mini Dow contract:

Hedgies have been very long for weeks and as you see, the small trader has been a lot more suspicious of the overall bull trend.  And last week, hedgies massively swung over to the short side – and that could be my signal to expect a decent rally phase up ahead.

But with volatility bound to be extreme into the Fed Wednesday meeting news, I am in no hurry to trade with any size just yet.

The Dow is just one of the markets VIP Traders Club members trade.  In fact, I am following about twenty different markets for the Club.  To get full details  how it works, click here.

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