Thursday, April 21, 2011

MTU Weekend Ed. - DX and EURUSD, Potential x Waves too (4/21/11 Close)

A wave [B] (or wave [X]) decline in the USD index
A major development this week is the collapse of the USD index (DX) to below 74. The late 2009 low in DX has now been breached, invalidating a number of bullish counts as a result.

Short of sending the relative valuation of the U.S. Dollar to the abyss (Chart 1, red), and given the near record low sentiment towards the buck and the somewhat overlapping wave structure in DX during the recent decline, a wave [B] (or wave [X]) decline appears to best fit the wave personality (Chart 1, purple). The decline could technically be a lengthy 2nd wave (Chart 1, blue), but it may prove to be too optimistic and the burden is on the buck to prove its strength if and when the downtrend reverses.

The proposed primary count suggests that DX is in the middle of a multi-year upward flat. At the moment, it is not clear if we'll have a regular flat where the 2008 low will hold or an expanded flat where the 2008 low will fail. Chart 2 presents two tracking count of the near term decline.

The implication is that once the proposed wave [B] is over, the USD index will launch a five wave rally to above 90, and possibly to above 100.

Given the overwhelming weighting of the euro in the USD index, it's hard to imagine a turn in DX before euro tops.

The primary count on euro's strength relative to USD over the past year is a wave [X] (Chart 3, blue), similar to the primary count for U.S stocks (see A potential x wave (2/4/11)). The green count in Chart 3 offers a super bullish interpretation, which appears less likely at the moment. However, the nature of the [X] wave can have the euro will top below or above 1.50.

Chart 4
presents two tracking counts on EUR.USD. The primary count (Chart 4, blue) has the euro's advance in its final stretch if not already topped, assuming wave [v] does not extend. Should wave [v] extends with the recent high as (i) of [v], euro will rise above 1.50 with ease after a brief pullback. A decline below 1.41 calls the top based on the primary count.