Sympathy For The Dollar?

Well it's not very often I make long-term calls on the markets.

Being a short-term, systematic trader pretty much bars me from thinking too much about the 'big picture', my focus being firmly on the 'here and now'. 'Don't let a good long-term view get in the way of a short-term trading opportunity' has been my mantra for a very long time now but it wasn't always like that as my path to discovering the merits of rule-based trading has taken some very interesting twists and turns over the years. Like many before me and no doubt after me my 'belief system' took some time to develop as I found myself oscillating between discretionary methods in the style of a very short period R.S.I. at times!

In a former existence my modus operandi rested heavily on the use of Elliott Wave Theory, a predictive, discretionary approach popularized by Robert Prechter (respect) and others down the years. The last time I made a big 'call' on the markets was in May 2014 when I used Elliott's theory to predict a very steep rise in the value of the US dollar and corresponding crash in EUR/USD and other related FX pairs. Depending on how you view discretionary methods of forecasting either I was lucky (winning a 50/50 bet) or I was ahead of the crowd, acting on an informed judgement. Either way I think it would be a very interesting exercise to have another look at the market through Elliott-tinted spectacles to see what the tea leaves have in store for the world's most popular currency.

To recap, my bullish call on the US dollar (bearish call on EUR/USD) was based on the premise that the whole advance from the 2011 all-time low was a bear market rally which had further to go (notice the series of lower highs and lower lows on the multi decade chart). Here is the forecast recorded live on Dale Pinkert's LAR interview.

This meant that a steep advance in the US unit was very likely over coming months but, importantly, the advance was to be 'corrective' in Elliott wave parlance and would eventually be reversed when the long-term downtrend in the US dollar re-asserted itself. The headline call was for EUR/USD (then trading at 1.3630) to decline to around 1.1600 and then to base out in preparation for a resumption of the major uptrend (note EUR/USD nearly doubled between October 2000 and July 2008.). As markets often do the forecasted decline went a little further than I expected as the Euro plumbed the depths around 1.0460/65 before basing out last March.

As part of my system-building process I like to look for what I call Profitable Trading Opportunities (PTO's), i.e. what were the price dynamics just prior to a particular move? In this case the pertinent question would be, "What do US dollar tops look like?" Zooming into the price action around previous US dollar tops during the bear market I noted the following sequence:

1) Market trades at a 24-month (two-year) high

2) Market breaks through a 2-month low

3) Market breaks through a 2-month high but fails to make a new two-year high (lowest point the 'reaction low')

4) Market breaks through the 'reaction low'

5) Market trends lower on a multi-year timescale

As we currently sit the US dollar index has satisfied conditions 1) to 3) and has started to decline sharply of late with pressure now building for a test of the 'reaction low' (stage 4) which formed last August. In EUR/USD terms this equates to conditions 1) to 3) being satisfied in reverse with pressure now on the 1.1713 August 2015 reaction' high.

Only time will tell whether (as I suspect) we will see new two year highs in EUR/USD and if we do, whether such a move would coincide with a stampede out of the US dollar as has happened in the past. While things could well be 'different this time' as the Eurozone grapples with its own problems and we might not see the same 'bang for the buck' on a US dollar meltdown, I would warn that there is more than an outside chance of 'expecting the unexpected'

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