USD Erosion First Approached as Corrective

November 1, 2016 3:29AM CDT


ON the heels of Fri's break below last Wed's 98.33 initial counter-trend low, overnight's further erosion below Fri's 98.24 low clearly reaffirms the short-term trend as down and identifies 25-Oct's 99.12 high as one of developing importance.  Given the magnitude of the past 2-1/2-month rally however and the fact that the market is only now returning to a 98.17-area of former resistance that is considered a new support candidate, traders are advised to first approach this setback as a corrective/consolidative affair consistent with a broader bullish count.  A failure below 18-Oct's 97.60 corrective low and short-term risk parameter remains required to threaten the broader uptrend enough to warrant defensive measures to a bullish policy.

Dollar Index 240 min

The daily chart below shows the developing potential for a bearish divergence in momentum, but proof of weakness below 18-Oct's 97.60 corrective low remains required to CONFIRM this divergence to the point of non-bullish action like long-covers.  This chart also shows that 97.60 corrective low and risk parameter as a key former resistance area from late-Jul that performed its role as new support perfectly following 11-Oct's breakout above this threshold.

Dollar Index Daily

Dollar Index Weekly

A bullish count is not without caveats however, and one of them is the market's return to the upper-quarter of the 100.50-to-91.92-range that has encapsulated it since Mar'15 shown in the weekly chart above.  If there's a time and place for this market to disappoint bulls once again, it may be here and now.  By the same token and from an even longer-term perspective shown in the quarterly chart below, the past 20 months' mere lateral price action looks to be a textbook example of a simple bull flag consolidation within the secular uptrend from May'11's 72.69 low that ultimately suggests an eventual resumption of this bull to at least one more round of new highs above 100.50.  And such (suspected final, 5th-wave) rallies are typically associated with and fueled by highly emotional and obvious fundamental news.  Between the Fed and the U.S. presidential election, it's not too hard to scrounge up some fodder.

These issues considered, a bullish policy remains advised with weakness below 97.60 required to defer or threaten this call enough to warrant a move to the sidelines by shorter-term traders with tighter risk profiles and for longer-term players to pare bullish exposure to more conservative levels.  Near-term strength above yesterday's 98.70 high will likely diffuse the past week's sell-off attempt and reinforce this bullish call to new highs above last week's 99.12 high and possibly above 02Dec15's 100.51 high.

Dollar Index Quarterly


Euro Index 240 min

The technical construct of the euro is virtually identical to that detailed above for the USD Index, only inverted.  Near-term gains over the past week define 25-Oct's 1.0850 low as one of developing importance, but we believe further strength above at least 18-Oct's 1.1027 corrective high remains required to suggest this rebound isn't an interim (4th-Wave) correction within the broader downtrend from 18-Aug's 1.1367 high shown in the daily chart below.

Euro Index Daily

Euro Index Weekly

The bigger threat against a more immediate bearish count in the Euro is the market's position still deep within the middle-half bowels of the lateral 20-month range shown in the weekly log scale chart above.  As we discuss religiously, such range-center environments are fertile ground for aimless whipsaw risk and further gains above 1.1027 would be JUST like this market to whipsaw bears out of position before resuming the larger-degree 2-1/2-month downtrend.  The fact that our RJO Bullish Sentiment Index remains historically low at a mere 20% reading currently contributes to at least interim upside vulnerability.

From a very long-term perspective however shown in the quarterly log scale chart below, the past 20-month lateral chop looks to be an excellent example of a simple bear flag consolidation pattern that warns of an eventual resumption of the secular downtrend that preceded it.  In sum, a bearish policy remains advised with strength above 1.1027 required to defer or threaten this call enough to warrant a move to the sidelines by shorter-term traders and for longer-term players to pare bearish exposure to more conservative levels.  Ultimately a recovery above key former support-turned-resistance around 1.1130 remains required for long-term players to jettison bearish exposure altogether in order to circumvent the heights unknown of another intra-20-month-range rebound.

Euro Quarterly

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