Euro The case for the Dollar

I was strong on the case for a falling dollar when I made my bull market case for Gold. So this is what I would like most. But the dollar started to rise and the largest component of that is the Euro so let us look at the Euro. Remember a rising Euro means a falling dollar.

The Euro has been moving lower since May and the recent move up is not like the start of an impulse yet and the recent move can be put in a channel just like the one in June after which prices fell lower. Yes these flags have slowed down the decline but this is what it looks like. The upper channel line is near 1.1218. After wave c completes another move lower is what I would expect.

On a larger scale either the Euro would support the 5th wave case for the Dollar or it would form a triangular pattern before the trend for the dollar changes long term. So we could be in wave E down of this triangle. We have not reached the lower end. But having fallen in 3 waves we could have truncated and the Euro may turn bullish now? Maybe but as I said above the recent rise is 3 waves like a flag meaning that more bearish legs for the Euro should exist before the triangle is complete. Measures of sentiment are also not extreme. But if the Euro does start making higher tops and bottoms beyond 1.1218 with impulsive behavior I will consider a view change. For now the case is for a weaker Euro after this bounce is complete and that still means a stronger dollar for some time. Once the triangle appears complete I should consider the long term reversal case for the Dollar and Euro once more, but till new evidence shows up my bias should be for a weaker euro and stronger dollar. 

Here is the opposite case that can be argued on the dollar index. And the reason to consider it too if the Dxy falls below 95 is that we have seen many dollar pairs fall this week quite sharply and so it is not yet clear if these are hiccups or major trend reversals. Many like the AUD/CAD/BRL were expected to have started to weaken again but have not. So In May when I made the bull case for the dollar I also said the fall could be a leading diagonal and if retracements are respected we start wave 3 down big time. Such a move would be bullish for commodities. So far apart from crude most commodities held their own. Some like Aluminium did react though but copper has not fallen a lot. So the dollar selling off from 61.8% after a 3 wave rise does raise a flag that a major dollar decline started. A few days to see if this is a trend should confirm. Below 95 and then 94 we would get stronger confirmations of a long term decline at hand. I am going to watching this development closely.

If the dollar does fall it may as shown below also be part of a wave 4 triangle. Consider this as a last alternate and a bullish one longer term. This means the dollar index falls to 91.25

USDJPY

The other USD pair in the limelight is the Yen pair. USDJPY unlike the Euro has been in a free fall for a while. And every bottom call has led to only a short term rally as was the case recently. Again it is falling from the 20 week average. So here is the long term alternate count. I know given that Japan wants to stimulate again the USDJPY should again start a third wave up. But consider this they are reviewing their plan for its effectiveness. On the other hand the pair topped a the wave 4 high long term. This is a 30 year chart. The trendline of the highs and wave 4 high coincided in pushing the pair lower. Wave 4 regions are act as trend reversal levels so I wonder is it possible that the downtrend long term for the USDJPY has again resumed. Is it heading to new lows in another deflationary round. Lets see the next major support is closer to 96.

Gold Sensex Ratio

The Sensex/Gold ratio peaked in 2007 so it can be said that since then Gold has out performed the Sensex except for brief periods of time. And once again over the last year Gold is the winner. And this should now continue till the ratio hits a new low below the given range. This would happen either as gold prices soar or equity prices dip or both. So based on this one indicator the Kondratieff winter is not yet ended and the cycle will complete when this ratio breaks below the lows seen in this chart to a new range below it.

Crude

Crude compltes a wave iii down mostly and a minor wave iv bounce may occur before the trend down resume. 42.80 is 23.6% retracement which is normal. 44.13 is 38.2% just in case. Mostly it should not do more than 38.2% in a wave iv which would be close to the 20dma as well. After that wave v down to 38 maybe expected.

Dow and Nasdaq

Inter market divergences are the basis of the Dow theory. Confirmation and non confirmation between key sector indices give us clues about near term and long term trend reversals. This chart shows a series of divergences between the Dow and Nasdaq [yellow], at all the recent peaks and troughs. So recently we have a slowly trending higher Nasdaq composite every day even though its daily momentum is diverging the other way and this is not confirmed by the trend in the Dow, so it makes an interesting cocktail. Of course a divergence requires confirmation by the Nasdaq actually giving up in price, and at this stage is an observation. A few times the reverse may happen if the Dow catches up with the Nasdaq. 

Dax - first five

The Dax has been tracking its vth wave up in a channel and finally gave up breaking the hourly chart channel with a 5 wave decline. This is usually the first sign of a trend reversal.

Euro

The Euro now remains in close watch for this a-b-c rise to complete near the upper end of the rising channel trendline. It must be proven wrong if the Dollar bears are to be right. If this results in a sell off in the Euro then the Strong dollar view will again be reinstated strongly.

Aluminium mcx

Aluminium bounced back 61.8% from the break point of the triangle patttern. So wave ii maybe complete and wave iii down from the high of 111 to 103 may start.

USDCNY

The Chinese Yuan has started to get strong again. The USDCNY appears to have fallen in 5 waves which means a trend reversal. I have marked this as wave a for now. And even if we get a wave b bounce wave c follows next. So we are not going to have to worry about a falling yuan for some time. In fact we just completed wave 3 at a larger degree so we could be seeing months of consolidation or no news about Yuan weakness to come.

This second chart gives you a bigger picture. we can mark the move as 1-2-3-4- or A-B-C. in case we are in wave 4 we do not go below 6.47 but remain in the 6.47-6.70 range for months forming a triangle pattern till it is complete. Then move up again. But if A-B-C is complete then it means a strong Yuan that can take back all the losses against the dollar that it made in the last few years. I am not sure if that helps because the policy was towards a weak currency for a while so how will a strong CNY help China? Good question to start asking. Or else to wonder if one day they are going to step in and intervene to directly devalue. Not for a while I think give that we are in wave 4 at least.