US DOLLAR: Is It Time To Buy Dollar?

The 6 long years of continues depreciations of the US Dollar has pushed the greenback to the backstage allowing the Euro and the commodities to take the spotlight; as the greenback lost its’ value and appeal investors flew to other asset classes to hedge the falling dollar. However, for the past weeks there were evidenced of scalpers picking up the battered green currency and investors starting to notice the US Dollar coming to life again. Still, others believe the rebound could be short-lived. Let us look at the widest time frame available for the US Dollar Index to try to determine where the Dollar is headed.

Looking at the 9 years chart of the US Dollar Index, the Dollar fall off the cliff when it broke down from its’ bearish head & shoulder pattern last mid 2002, the downward momentum that followed the break down was quite strong which is a typical characteristic of a Wave III; the dollar recovered early 2005 but the rally lasted for a year only; interestingly, the index formed a smaller head & shoulder pattern during these rally, the Dollar once more broke down from this bearish pattern and the downward momentum accelerated again, the difference between this downtrend from the preceding downtrend was the evidence of a sort of ‘capitulation’: for a month or so, the 71 level was severely tested (refer to upper right portion of the chart) but it was not broken this could be because “shorters” were no longer too aggressive or eager in pushing down the Dollar further; moreover, notice that the recent consolidation was preceded by a larger consolidation pattern (Dec ’07 to Feb ’08), consolidation after consolidation only occurred on extreme exhaustion, compared with bottom of wave III there were no consolidation patterns but only sharp rallies (refer to mini wave 3 to 4 of Wave III and early leg of Wave IV). Henceforth, the recent downtrend (2006 to April ’08) could be Wave V (note that capitulation normally happens on Wave V, result of over-extended or over-stretch of a trend).

COMPARING WAVE IV CORRECTIVE WAVE CYCLE WITH RECENT COUNTER-TREND MOVE

Wave IV rolled pass 2004 trough resistance but failed to break above 2003 stronger trough resistance; of the same importance, recent Dollar counter-trend move must clear its’ recent ’07 / ’08 troughs and subsequently breaks above ’05 stronger trough resistance (or bottom of Wave III) for the US Dollar to have a clear trend reversal.