US Dollar Falls to New Lows, and So Do Excuses to Explain It

07/20/2017 2:57 am EST

Focus: STOCKS

Michael Golembesky

Analyst, ElliottWaveTrader

If that 97.15-98.78 resistance zone does break, then the DXY may once again re-visit January highs. The pressure could remain down on the DXY at least into this fall, says Mike Golembesky, an Elliott Wave analyst covering U.S. indexes.

The DXY Index, which is widely cited in the financial press as the “dollar” or “U.S. dollar,” has seen a correction that began in January of this year after topping at the 103.82 level, and has continued into this week’s (July 18) low, which came in at 94.48. This represents a move of just under 9%, which in the currency markets is not a small move.

Over this time period and since the 103.82 high was made, the DXY Index has been following a fairly clear pattern down off of that high and into current levels. In fact, for the past several months we have been watching this pattern as it continued to follow through, hitting most of the expected Fibonacci levels into the July 18 low. Currently, the DXY is sitting on both the 176.4 Fibonacci extension of the initial move down off of the January highs and just under the 200 Fibonacci extension of the move down off of the April highs.

Additionally, we do now have what could be considered a completed three-wave pattern off of the January highs in addition to several other technical indicators signaling that we may be getting close to at least a local bottom in the DXY.

I have recently been writing about the so called "bombshell" news events that the financial press and media pundits love to assign to market moves. We have seen these bombshell events run the gamut from Brexit to Trump's surprise election to Russia meddling in the U.S. election.

Most recently, we had the release of emails from Donald Trump Jr. in regards to a meeting that he had with Russian nationals during the campaign. I discussed how this media bomb turned out to be yet another dud as far as the financial markets were concerned in the article I wrote on the Dow on July 18.

Tuesday’s bombshell news that was all over the financial press Wednesday was that U.S. dollar was down because the Republicans were unable to be able to pass their healthcare bill, thus causing the dollar to move lower.

Of course, the question that comes to mind on this news is:  What exactly do the Republicans failing to pass a healthcare bill have to do with the value of the U.S. dollar?

The pundits, of course, were arguing that this was evidence that the "Trump trade" was breaking down and that it was becoming clear that Trump would be unable to move forward with his pro-business agenda. Well, assuming that we were to buy that argument and if that was indeed the case, then why did this news not cause U.S. equity to move lower?

Both the S&P 500 (SPX) and Nasdaq (IXIC) closed the up on the day and only the Dow Jones Industrial Average (DJI) closed slightly in the red.

Shouldn’t this news have caused stocks to go move lower? Surely, the hint that there will now be no corporate tax reform, no healthcare reform, or all of the other pro-business policies that are on Trump’s agenda should have had a much more drastic effect on stocks than the U.S. dollar.

I mean, really, isn’t it higher interest rates that are supposed to cause the dollar to move higher? Well, rates have been going up all year yet the dollar has been going down. We didn’t hear much about that since it didn’t fit the narrative on this topic. So now after the dollar is down close to 9 percent off of the January highs all of the sudden a small half a percent move was caused because the Republicans could not pass a healthcare bill.

Now we are supposed to believe that after the dollar is already down close to 9 percent since the January highs, all of the sudden a small half a percent move at the tail end of this move was due to the fact that the Republicans could not pass a healthcare bill. Really? I have a suspicion that something else may have been at play here. 

In most cases, we will see the financial media pundits search out news to explain the cause of a move in the markets. In this case, it appeared that the pundits were attempting to attach some kind of negative reaction in the financial markets to what they perceived to be bad news for Trump. 

Unfortunately for them, with the equity market trading higher, they could not claim that stocks down were down on this news. Unfortunately for the rest of us, they managed to make an otherwise mundane continuation of a seven-month long downtrend in the dollar into a something that it clearly wasn’t.

At the end of the day, the fact of the matter is that stocks did not move down on this healthcare news, and neither did the dollar. The DXY Index moved lower Tuesday for the same reason that it had been moving lower for the past seven months; simply because the collective sentiment of those who speculate on the currency pairs that compose the DXY index was and continues to be, negative. This, of course, does not make for a very good headline. So while unfortunate it is not surprising that we saw something quite different in the press.

So while it is true that the dollar did move to a nominal new low on Tuesday, the excuses that were used to explain that move may have just hit rock bottom.

Taking a look at the weekly chart below one can note that the move down off of the January highs in the DXY is the largest move that the index has seen to the downside on a percentage basis since 2010. One can also note that the DXY is currently trading in the upper end of the long term support zone which I currently have in 96.27–91.12 zone (notated on the chart as a yellow box).

This long term support zone should ideally hold if the DXY Index indeed going find a bottom of this larger degree fourth wave and make at least one more high back over the 103.82 level to completing the larger degree wave structure up off of the 2008 lows. Now with that being said because fourth waves are one of the more difficult parts of the pattern to accurately track the action on this larger time-frame is likely to be quite sloppy for some time. This is not to say however that we may still find some shorter term patterns which are indeed quite

Fourth waves are one of the more difficult parts of the pattern to accurately track so the action on this larger time-frame is likely to be quite sloppy for some time and until we are no longer in this larger degree fourth wave.

This is not to say however that we cannot find some shorter term patterns that are more predictable and that would allow us to lay out some more accurate price levels to follow. Often within the larger degree fourth waves, we can find a smaller degree pattern which is actually quite predictable. We can see an example of this type of price action on the four-hour chart below.

On the four-hour chart of the DXY, we can see that the move down off of the January highs has been following a very clear pattern that we can label as impulsive. In fact, this move has followed our Fibonacci Pinball price guidelines almost perfectly since the top of what I have labeled as wave (ii) was struck in March of this year.

As noted earlier, the DXY Index is currently sitting on both the 176.4 Fibonacci extension of the initial move down off of the January highs and just under the 200 Fibonacci extension of the move down off of the April highs which are very common target levels to hit for third waves. That being the case, until we see a move through the 96.04 level to give us an initial signal of a local bottom being struck with further confirmation coming with a break of the 96.51 high, I still cannot rule out further extensions of this third wave to the downside.

If and when we do break through the 96.15 level then I will be keeping a close eye on the 97.15-98.78 resistance zone as this is the next big hurdle that the DXY would need to overcome to suggest that the next move higher is something other than just a smaller degree wave (iv) and thus continuation of the initial trend that had begun back in January of this year.

If that 97.15-98.78 resistance zone does indeed break, then the DXY may once again re-visit the January highs. Unless and until that resistance zone is breached, the pressure will remain down on the DXY at least into this fall.

See charts illustrating the wave counts on the DXY.

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