Dollar Bears Ready to Hibernate?

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Good morning traders.

Not only was the coffee I made this morning incredibly good (French pressed Ethiopian from Backporch Roasters here in Bend), but right after I took my first sip, I looked at my quotes/charts and that brought yet another smile to my face.

Traders and investors actually bought the Dollar Index (DXC) overnight!

Now I am not one to get hooked in by price action at this early stage, but it is encouraging.

I then noticed an email from Phil T. over in Taiwan:

Dave,

How much of your DXC view is tied to your bullish fundamental view on USD?  I know you have held this view for some time as you highlighted on RealVision TV etc.

I have heard the offshore USD shortage thesis of Raoul and others and just struggle with it a bit.  

What in the price changes your view on DXY and may lead you think the 103 level was actually a much more significant top.?   

What level on the DXC completely invalidates your thinking from a price perspective?      

Phil T – Taiwan

Thanks for the question Phil. I will primarily answer this from a technical standpoint. However, I would argue that the US is the only G10 country on a path to normalizing rates, it offers the USD an advantage vs other currencies. Raouls thesis is excellent and makes sense, and I add that into my analysis as well.

But for me, price is the final arbiter, and while 2017 has not been favorable to the buck, I still see this as temporary.
  • Using the May 2014 low the trend remains up overall.
  • The Elliott Wave Count too defines a clear uptrend. The recent pull-back appears to be a pause, not the start of a new leg lower.
    • The price action off the Jan 3rd high is corrective (choppy, overlapping and in 3-wave structure) thus suggesting a pause.
  • Prices have generally respected trend-line support around 100.40. Yes, prices dipped below this week, but are now pushing back above
  • I have been encouraged all week, unlike the last couple of weeks, by the slowing or even disappearance of the downside momentum. I am sure many clients noticed this and it occurred right at price levels and wave structures that suggest a low has formed.

Nonetheless, where am I wrong in all of this?

  • I would have serious concerns below 99
  • 103.50-104.00, as you note Phil, could be a top, but per bullet point #2 above, that seems unlikely since there is not an impulsive 5-wave move lower.
  • Given the nice push higher overnight, I would ideally like to see 100.40-10.65 taken out during the US session. This would add confidence to the outlook.

For now, this is the chart that is keeping me bullish. If proven correct, it will have been a bumpy ride for sure. But one of my goals for 2017 was to start looking beyond the noise each day/week and really take hold of the bigger picture and structure/build positions around that. I am under no illusion that I (or anyone) can dial in exact turning points in the market, but building positions into zones of resistance/support within a strong trend is what will produce big gains over time.

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