FX Trading: Turning to the Technicals for Guidance

12/11/2008 2:14 pm EST

Focus: FOREX

Jack Crooks

President, Black Swan Capital LLC

We've told our story as to why the US dollar has possibly entered a multi-year bull market. And depending on where else you dig for investment advice, you may have also heard why the US dollar has not entered such a bull market...why this is only a correction in the major long-term downtrend.

To us, that's the old story. And it seems that those sticking to the old story are failing to recognize the importance of some key changes to the global financial system and economy. I'm not sure exactly why a potential US dollar bull scares some so much. Maybe it has something to do with gold.

Anyway, with the fundamental drivers out on the table, it's only a matter of time till we find out who is right about what direction the dollar will take over the coming months and years. We're not 100% confident our story will prove true. And we're far less confident the old story will prove true.

So as we press on, we seek out confirmation as to whether we're right or wrong. Beyond monitoring the latest data on interest rates, GDP, exports, et cetera, it's in technical analysis of price charts where we search for confirmation.

The extent of technical analysis is mind-boggling. With so many different types of momentum indicators and trend studies, it's easy to get overwhelmed. That said, we try to keep it simple: trend line analysis, basic moving averages, Fibonacci retracement levels; stuff like that.

About as deep as we get into the realm of technical analysis-so as not to cloud our perspectives-is with Elliot Wave. Elliot Wave theory is very deep, but its basic purpose is to help indentify repetitive, predictive waves. These waves form and repeat themselves as pieces of larger waves, and so on.

From where we stand now, we see this most likely wave scenario shaping up in the nearer term.

Dollar Remains in Wave Four Corrective Move, More Downside Ahead

As it is now, wave four of this move is not set in stone. Elliot defined corrective trends as consisting of three-wave patterns (e.g. a-b-c). So the dollar could continue lower before wave four is complete. The following chart shows how this might potentially play out.

Chart

That's where we are now. Around 8310 on the dollar index is the next chart support (trading at 8411 now). The next key Fib support comes in at 8190 and wave C as an extension of wave A comes in around 8150. So maybe that's the first viable target?     

What we do find a bit odd is the relative currency move today-the entire pack is rallying against the buck. Could this be something "wholesale?" 

The correlations we are used to seeing are "out of whack" a bit. For example, both the yen and euro are sharply higher against Greenie-not a pattern we've seen for some time. Stocks are bidding lower and bonds are higher. It ain't helping the buck, yet this pattern has mostly been supportive-hmmm. Some are saying the move higher in gold means concerns are now becoming US-specific. Given today's dollar action, we have to be wide open to that potential. 

By Jack Crooks, President, Black Swan Capital

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