More US Dollar Surprises Ahead

01/09/2012 3:00 pm EST

Focus: FOREX

Jim Martens

Editor, Currency Pro Service

Those who followed Elliott Wave patterns in the US dollar weren’t surprised by the recent upside run, says Jim Martens, who explains why the bullish price movement is likely to continue.

All currency traders are really focused on the US dollar, of course, and even traders who aren’t trading currency are watching the US dollar to see what’s going to happen.

Our guest today is Jim Martens from ElliottWave.com to talk about where we are with the US dollar. Everybody wants to know if the bottom is near or what happens next?

Right, well, you go back just a couple of months ago and there was a magazine article talking about “The dollar has nowhere to go but down.” It was a cover article with George Washington with a black eye. 

If you look at the charts, the dollar actually bottomed in April, early May, and the dollar has held its own against most of the major currencies since then. Recently, it has actually accelerated higher, doing the opposite of what most people believe it should do.

So what kind of things should I be looking for in the market? Are you looking at specific levels on a chart, some fundamental news, or what the Fed is doing? What do you concentrate on?

I look at patterns. I follow the Elliott Wave theory that says markets follow specific patterns on multiple degrees of trend. 

We look at, say, a daily chart in conjunction with a 15-minute chart, looking for similar patterns on both charts, and when we see a pattern that tells us the market has turned, we have something to work with.

Can you talk about a favorite pattern that would show a reversal?

The basic pattern is a five-wave movement. So if a market has been declining—as the dollar has been for a long time—and all of a sudden, there is a five wave movement. It’s three upward legs, the upper leg separated by sideways movement or pullbacks that hold the previous low, that’s a reversal pattern. 

You’ve seen that recently in US dollar/Swiss franc (USD/CHF), which for a long time had been the leader against the dollar; it had been the safe-haven currency. All of a sudden, it’s lost its luster, and the dollar is very strong against it. It’s already showing us a five-wave advance, which signals a major turn underway. 

See related: Trade Forex Trends in 2 Clear Steps

NEXT: How Long Might Dollar Strength Last?

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Now people were taken by surprise, it seems, by the dollar strength. Was it surprising to you as well, or did the chart tell you that was coming?

We thought that was coming. From patterns in multiple markets and looking at market psychology, we thought the dollar had nowhere else to go.

All the bad news was already priced in, so it’s not a surprise the dollar advanced, even though most people see it that way. To us, we’re not looking at the fundamentals because we think they lag the market instead of lead the market; they’re already factored into price. 

It seems like people are always watching Ben Bernanke when he’s on TV. Do you keep an eye on that even though you’re strictly a pattern player?

Recently, there was an FOMC announcement. The dollar was falling as they were getting ready for the announcement, and just as they announced it, we saw a pattern completing, so we were able to talk to our clients and say “An Elliott Wave pattern is ending here. It’s a correction; the dollar is going to resume its prior rally.” That’s exactly what happened. 

Long term then, what is Elliott Wave telling you about the dollar into 2012?

I think it’s safe to say it will be higher going into the New Year. Usually currencies are very trendy, and I’d expect the rally lasting about six months or more. 

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