The US Dollar: Key to the Market

The US Dollar is the reserve currency and just about everything (inside and outside the stock market) is priced based upon its current value. Almost all asset classes have a relationship with the dollar. Gold and oil are priced in US dollars. The currency of virtually every country in the world is priced based upon its relative value to the US dollar.

For over two years now, I have said, “Watch the dollar. Because when it reaches the bottom of its correction, that will be the top of the US equity market.”

I’ve also talked incessantly about “all the same market.” For the first time I know of, all asset classes are moving in tandem. It seems they are all going to turn at a top together. Even US treasury bonds are completely a trend and turning.

We have a turn starting to take shape to the downside in the US Dollar. That’s the second to last turn (the penultimate turn) before a US market top. The turn at the bottom (below $23.00 on UUP, or 11,500 on the US Dollar chart, or $88.00 on the Dollar Index) will be the top of the US equities market.

Above is a 7 day chart of UUP, the recognized US Dollar ETF that parallels the movement of the dollar. The patterns are virtually the same.

The chart shows five impulsive waves up, with a second wave arguably in place once we get a test of the low. That’s the bigger picture. The larger trend is up.

Let’s look at the shorter term. In the above chart, we have an A wave down to about $23.00 from the high just under $27.00 and a B wave up to ~$25.00. We now need a C wave down to test the previous low around $23.00. The horizontal line on the chart at 23.14 is at the 62% retracement level and makes the current corrective wave a second wave.

This is predictive of a large third wave that will travel well above the $27.00 level. If the US Dollar rises, it’s deflationary. When goes up in value, it means it’s scarce (there’s no enough money in the economy to satisfy demand). In other words, credit is drying up; debt is beginning to disappear.  Under our current international banking system, debt that is repaid simply disappears. For an explanation of how banks work, you can read my blog post on it here.

As I’ve been saying for several years now, we’re heading into a deflationary spiral. If you’re on the right side of the market and understand what this means to the value of money (and take advantage of it), you’re going to be just fine.

Now that my technical issues have calmed down somewhat, I’m putting the final touches on a new version of my webinar, “Navigating the Crash,” along with a second webinar, entitled, “The New Rules of Investing in an Uncertain Economy.” More info to come this week on both of these.

In the meantime, US indices are in ending diagonals — SP500, ES NDX, NQ, Nasdaq Comp, Russell 2000, and Russell 3000.

Ending diagonals are ending waves. I consider them corrective. In a fourth wave position, which we’re in, they foreshadow an imminent trend change. That’s a hard rule that will NOT be broken.

Right across the board, it’s clear: We’re in the final stages of this 500 year bull market. The US Dollar, as I’ve been saying for over two years now, will be the key to timing the top of the US market, and other markets around the world. The US Dollar is ultimately going to increase in value. That’s deflationary. So is contracting credit, which we’re seeing worldwide.

After all these markets top (or bottom, as the case may be), they will all move down together in what’s going to be the show of a lifetime. The drop in the eventual third wave (likely this fall) will be labelled “the crash” and it’s likely to be breathtaking in it severity.

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Elliott Wave Basics

There are two types of Elliott wave patterns:

• Motive (or impulsive waves) which are “trend” waves.
• Corrective waves, which are “counter trend” waves.

Motive waves contain five distinct waves that move the market forward in a trend. Counter trend waves are in 3 waves and simply correct the trend. These patterns move at what we call multiple degrees of trend (they are fractal, meaning there are smaller series of waves that move in the same patterns within the larger patterns). The keys to analyzing Elliott waves is being able to recognize the patterns and the degree of trend that you’re working within.

The motive waves shown above are typical in terms of their look and length. Subwaves of motive waves measure out to specific lengths (fibonacci ratios) very accurately. Motive waves are the easiest waves to trade.

Waves 1, 3, and 5 of a motive wave pattern each contain 5 motive subwaves. Waves 2 and 4 are countertrend waves and move in 3 waves.

Motive waves also travel in channels. The red channel above can be drawn from the apexes of wave 1 and 3 on one side and waves 2 and 4 of the other. The end of wave 5 typically meets the trend line on the wave 1 & 3 side before it reverses.

Countertrend waves move in 3 waves and always retrace. You’ll find much more about them in the countertrend section and the page on “The Right Look.”

To use Elliott wave analysis accurately, you must be able to recognize the difference between a trend wave (motive) and a countertrend wave (corrective). There’s very much more to proper Elliott wave analysis, but this gives you the basics.

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The Market This Week

Here's the latest daily chart of ES (emini futures)

Above is the daily chart of ES (click to enlarge, as with any of my charts).

We  wait, ready to pounce. The third wave of the ending diagonal is not yet complete. It's been a bit of a cat and mouse game. However, the mouse is really weak has been careful about showing itself. Starting this weekend, however, it may be on the move up to the target.

Friday's market hardly moved except for the last half hour or so of the day. It seems it was all about a turn ... perhaps right across several asset classes. In the last half hour, ES gave us the signal it was going to start heading up in the final leg. However, we may see a little more downside before that move up happens.

The subwaves are getting difficult to read. From Monday through Wednesday, we traced out an A wave in ES that simply looks corrective. Thursday, we traced out a deep B wave down and Thursday night, we completed a small 5 waver up. Friday late in the day, we completed the turn to the downside. Are we done with down? I don't know, but we should know my Monday morning.

The early part of this coming week should see the final move up in the third wave of the ending diagonal.

The target is still above about 2803 or so and will lead to a strong 4th wave down, which I've been saying for weeks now. This third wave has been one for the history books, and not in a good way. It's been frustrating to say the least.

ES is extremely weak. The SPX/ES/SPY is the laggard, as the other US indices, for the most part, have hit their targets on the upside. This week should finally see the resolution, based on what I'm seeing this weekend.

Timing? Watch this date: July 27 — A nasty "Buck" Full Moon, with a total lunar eclipse
Mercury, Mars, Saturn, Neptune, and Pluto in retrograde

Summary: We continue to trace out the third wave of an ending diagonal. We're waiting for the third wave to top. Topping out will result in a high probability trade to the downside (the fourth wave of the ending diagonal). Once the 4th wave (down) is complete, expect a final fifth wave to a new high. That fifth wave up to a new high will be the end of the 500 year bull market.

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