This was an email reply dated 12 January 2010, in response to a friend's enquiry as to my view of the US Dollar Index. Though it is now almost a month, the view is still valid as at today, so, in my opinion, it is still worth publishing on this blog.
Chart is courtesy of Stockcharts.Com
Chart is courtesy of Stockcharts.Com
My technical view of the US$ Index Chart is that the US$ is bearish, because its price is below the SMA200. BUT, since December 2009, it has been making a strong rebound, and has even broken above, past the SMA50, but still below the SMA200, which is currently standing at 78.99. Nevertheless, it is on a minor sideways correction on the 1st Wave up, at present, and has even broken below the SMA50 level of 77.53. Other than this, we should note that the SMA200 is still trending downwards. This is what we know.
Now, for the application of Elliott Wave Theory general principles and guidelines. First, this is a new trend, and we don't know how far this new trend will go. But, there should at least be a 3rd Wave upward, before it is all over, after the 2nd Wave Minor Sideways Correction is completed. My timing calculation is still not very reliable, but it should be about now that the 3rd Wave should resume. As for Price Correction, I expect it to reach a Low of 76.75, and in fact, as at yesterday, it did a low of 76.79. This means that there is very little downside left, if I am right.
Please note that this is in contradiction of the signal we are receiving from the MACD which has crossed over to the downside, while I am thinking that the downside is limited. It is possible that the MACD will whipsaw upwards if I am right.
This is why you may want to wait for a breach back above the SMA50 as confirmation of my analysis, and put a stop loss just below the bar low of the breakthrough bar. Of course, this doesn't protect you from whipsaws, but if the trend is resuming, then, it should break above the SMA200 this round. If we are wrong, you lose one bar for this bet.
But let me put some words of caution to you. First, some technical traders prefer not to play when price is between SMA50 and SMA200, mainly because the trend is still weak, and thus, upside is limited, before another correction sets in. A strong trend is confirmed only when SMA50 is above SMA200 that is RISING. But, if you want to play, this is how I would play it, i.e. wait for the confirmation of a breakthrough bar above SMA50, and place a stop loss just below the breakthrough bar low, in case, the market changes its mind.
From past observations, this type of market situation will lead to a rise above the SMA200, but will then fall again, to either just about the SMA200 and mark time, till the SMA200 turn around to an uptrend, or even breach below the SMA200 one more time, before it goes into a longer term uptrend. This is one key scenario .... a breach above SMA200, and then, a fall to around SMA200, or even slightly below, before going on a longer term uptrend.
Another key scenario is where it goes above the SMA200, and then, it is game over, as it falls back straight down, quite fiercely, catching all the bulls by surprise, as it resumes its EXISTING long term DOWNTREND. At this moment in time, we don't know which one it will be. This is where our stop loss management covers us for the uncertainty.
Again, a technical trader thinks very differently from a technical analyst. Whilst the technical analyst thinks in terms of correctness of his outlook, and is expected to be decisive in view, the technical trader does not assume he is correct in his analysis, but instead, focuses on risk management that he can be wrong, although probability is slightly in his favor, over the long term. This is why I am not so focused on wave counting, but rather, the identification of scenarios on what can happen, and what is likely to happen, and what I will do, if I am wrong, including, where I will admit that I am wrong .... the stop loss.
The last question which I need to answer is "How far will the 3rd Wave go up before it falls in another correction? I estimate the 3rd Wave to have a maximum upside potential of 84 +/- 0.5, before falling.
As for your question on 85-90, I don't think the USD Index will break past 85 by the 3rd Wave. When we get to around 82 to 83, we can reassess the situation, depending on what the MACD and Stochastics are telling us by that time, to see if there is a 4th and 5th Waves in the making, but I doubt it, based on what I see on the chart at present. I will revisit my outlook when nearing the end of 3rd Wave.
Best of luck in your trading.
Ooi
Now, for the application of Elliott Wave Theory general principles and guidelines. First, this is a new trend, and we don't know how far this new trend will go. But, there should at least be a 3rd Wave upward, before it is all over, after the 2nd Wave Minor Sideways Correction is completed. My timing calculation is still not very reliable, but it should be about now that the 3rd Wave should resume. As for Price Correction, I expect it to reach a Low of 76.75, and in fact, as at yesterday, it did a low of 76.79. This means that there is very little downside left, if I am right.
Please note that this is in contradiction of the signal we are receiving from the MACD which has crossed over to the downside, while I am thinking that the downside is limited. It is possible that the MACD will whipsaw upwards if I am right.
This is why you may want to wait for a breach back above the SMA50 as confirmation of my analysis, and put a stop loss just below the bar low of the breakthrough bar. Of course, this doesn't protect you from whipsaws, but if the trend is resuming, then, it should break above the SMA200 this round. If we are wrong, you lose one bar for this bet.
But let me put some words of caution to you. First, some technical traders prefer not to play when price is between SMA50 and SMA200, mainly because the trend is still weak, and thus, upside is limited, before another correction sets in. A strong trend is confirmed only when SMA50 is above SMA200 that is RISING. But, if you want to play, this is how I would play it, i.e. wait for the confirmation of a breakthrough bar above SMA50, and place a stop loss just below the breakthrough bar low, in case, the market changes its mind.
From past observations, this type of market situation will lead to a rise above the SMA200, but will then fall again, to either just about the SMA200 and mark time, till the SMA200 turn around to an uptrend, or even breach below the SMA200 one more time, before it goes into a longer term uptrend. This is one key scenario .... a breach above SMA200, and then, a fall to around SMA200, or even slightly below, before going on a longer term uptrend.
Another key scenario is where it goes above the SMA200, and then, it is game over, as it falls back straight down, quite fiercely, catching all the bulls by surprise, as it resumes its EXISTING long term DOWNTREND. At this moment in time, we don't know which one it will be. This is where our stop loss management covers us for the uncertainty.
Again, a technical trader thinks very differently from a technical analyst. Whilst the technical analyst thinks in terms of correctness of his outlook, and is expected to be decisive in view, the technical trader does not assume he is correct in his analysis, but instead, focuses on risk management that he can be wrong, although probability is slightly in his favor, over the long term. This is why I am not so focused on wave counting, but rather, the identification of scenarios on what can happen, and what is likely to happen, and what I will do, if I am wrong, including, where I will admit that I am wrong .... the stop loss.
The last question which I need to answer is "How far will the 3rd Wave go up before it falls in another correction? I estimate the 3rd Wave to have a maximum upside potential of 84 +/- 0.5, before falling.
As for your question on 85-90, I don't think the USD Index will break past 85 by the 3rd Wave. When we get to around 82 to 83, we can reassess the situation, depending on what the MACD and Stochastics are telling us by that time, to see if there is a 4th and 5th Waves in the making, but I doubt it, based on what I see on the chart at present. I will revisit my outlook when nearing the end of 3rd Wave.
Best of luck in your trading.
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