Has the Dollar downtrend ended yet or not… that is the big question many traders are asking right now.
Today’s analysis will review the broader wave structure of the DXY downtrend and how it relates to the price-action of recent weeks. We will also consider the implications for the trading weeks ahead.
Have All Swings Completed Or Not?
The main question in the DXY wave structure is whether all wave degrees of the downtrend have already culminated or not. Price-action has been tricky to decipher and opinions differ on the matter across the internet. After thorough review of the internal subwaves, my personal stance is leaning towards the idea that we are still missing a final swing to the downside. The DXY daily chart (above) shows my preferred wave count as of today. Following is an outline of my reasoning for it (Note that for the sake of simplicity, i won’t bother with the official wave degree names, but simply refer to the colours that i have used for each degree) :
- An important key to get the swings labelled as accurately as possible lies in the extended wave 3 between Mar – Sep 2017. The subwaves need to make sense and resolve themselves. Therefore one big question is how many degrees culminated at the Sep 2017 low. The next chart below shows a close up of the final stages of this large swing. The subwaves work best if only white wave 3 finishes at the main low. It resolves the preceding internal structure the most. Orange wave 3 ended in a contracting diagonal (wedge), followed by a triangle (orange 4), a post-triangle drop (orange 5/black 3), followed by another triangle (black 4), which could be a either a normal or barrier triangle. Finally, the swing concludes in another post-triangle drop (black 5/white 3). The result of this count is that there are still 3 wave degrees to finish from the Sep 2017 low (i.e. white, blue and green)
- The next important area to assess is where exactly white 4 ends and white 5 begins because this will affect which wave degrees end at the Jan and Feb 2018 lows. When looking at the daily chart, it is initially tempting to label white 4 finished at the Nov 2017 high at around 95.15, and label everything that comes afterwards as part of the next swing already. But close inspection reveals that there are anomalies in the price structure especially between Dec 12 – Dec 22 (see next chart below), which makes it very questionable to count this as part of an impulsive swing to the downside already because the structure continues to subdivide best into 3-wave swings up until Dec 22, after which price begins to drop strongly. This all points much more towards yet another triangle structure for white 4, ending on Dec 22, followed by a post-triangle thrust, which subdivides perfectly into 5 waves into the Jan 2018 low of 88.42.
- The next and final point of interest is the structure after the Jan 2018 low. A big quandary for wave analysts is whether the drop from Feb 09 – Feb 16 counts as a 3-wave of a 5-wave move. How one answers this questions makes a huge difference regarding the completion of wave degrees. After reviewing it many times, I am happy to side with the folks who label it as a 5-wave move. Although the shape is awkward, the subwaves make a valid case for a full 5-wave impulse. The corrective blue wave 4 before the drop is also valid as a double zizag by itself. Together, this makes it valid to count another degree complete at the Feb 16 low (i.e. in my case blue 5/green 3) . This however still leaves a final wave degree incomplete (i.e. the largest green wave degree 4 and 5). Looking back at the daily chart, it becomes apparent that the entire price-action since the feb 16 low is quite well proportioned in relation to green wave 2 (from early 2017). I am therefore maintaining my bias that we are yet to witness a final drop in the DXY before the downtrend is fully spent. There are numerous ways to label the swings since the feb 16 low (the chart below is merely showing one of several equal options), but all of them make it it quite plausible to label the entire structure as a complex zigzag, which is about to complete at the time of this writing.
The next 2 weeks will undoubtedly make it clear whether or not the DXY downtrend is already finished or not. For the scenario of this article to be valid, we have to see a motive wave (impulse or a large ending diagonal) begin in the next day or so and lead all the way into a brand new low. Unfortunately there is no way to know which scenario is true until the best trade opportunities have already passed. Dollar Bears will therefore need to make their commitments very shortly to find out if their faith will be rewarded greatly or not.
All the best along your trading journey