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Saturday, November 06, 2010 11:31:26 AM
Dollar Index Daily Chart with Complete Wave Count
Here ya go, TTR. This will help visualize the way wave counts unfold in a series.
At the left, we have a full 5 wave impulse series to the upside. Notice that at the top, a divergence always occurs on the MACD between waves 3 and 5 to show that the run is getting weak and that a reversal is about to occur. This ALWAYS occurs at the end of a 5 wave series. I have yet to see an exception to this rule in EW theory. This happens because Wave 3 is the strongest, which produces a top peak on the MACD. Then we get a Wave 4 retrace which makes the MACD pull back. Then we see a final 5th wave to the top which is much shorter than Wave 3 and weaker so it produces a lower MACD peak.
That 5 wave series took place after a multi-year downturn in the dollar index. If we were to go back further, I could show you how the larger 5 wave series to the downside also produced a divergence between the final 3rd and 5th waves.
Ok, so we have 5 waves up in an impulse series. That move up is a larger Wave 1. EW theory says that we should now get a corrective series of waves for Wave 2 before the larger Wave 3 to the upside begins.
To figure out reasonable targets, we have to understand the psychology behind each type of wave. A Wave 1 move to the upside almost always produces a strong movement back to the downside that can retrace up to 100% of the original movement up. Typical fib targets are 61.8 and 76.4. Also, 78.6 comes into play. But extensions beyond these can also occur.
Wave 2 retraces typically occur in what EW theory calls a Zig Zag. A Zig Zag develops in 3 waves whereas the original move up was 5 waves. The reason it unfolds in only 3 waves is because it is a counter-trend movement to the bigger trend. In other words, the overall trend for the dollar index on a larger scale is up...3 waves down is only a correction. So a Zig Zag is described as an ABC movement rather than a 1-2-3-4-5 movement.
A Zig Zag looks like a lightning bolt and usually develops inside a trend line channel, which is what we have on the chart currently.
Now we need to understand the form of a Zig Zag. Zig Zags develop on a smaller level into a 5-3-5 wave count. In other words, Wave A will be 5 waves, Wave B will be 3 waves (which is also a small ABC movement) and then Wave C will develop into a final 5 wave sequence with a divergence at the end.
On the chart, we can see where we can easily count 5 waves down, then a 3 wave correction back up. That takes care of Waves A and B. The current downtrend is Wave C. Inside that wave, we have a large extended 3rd Wave. We recently had a nice bounce which takes care of Wave 4. The difference between Wave 3 (which is the most powerful) and Wave 4 helps produce the ending divergence we see between Waves 3 and 5 on the MACD at the bottom.
Now, we are finishing up the final 5th wave. This last wave down won't be nearly as strong as what we've already seen. In a Zig Zag formation, Waves A and C will be related to each other in a fibonacci-based mathematical way. They can be equal, which is common, or one can be shorter than the other and can form a .618 relationship to the other wave. Other combinations can occur as well but they always adhere to the fib levels in the A to C relationship for length.
In this case, Waves A and C are trending toward equality. At the point where they will become equal, we will intersect the bottom parallel channel trend line yet again. And we will have the final divergence necessary on the MACD to indicate that we have completed the 5th wave.
Another clue to this puzzle is the basic fact in EW theory that states than Wave 2 cannot exceed the beginning of Wave 1 price action. So, the absolute bottom for this movement, even if it went to extremes, is about 74.22 since that's where Wave 1 began.
If we tie this in with current negative divergences on charts like the DOW, we can see where it is topping as well.
One more fact to consider....there is a well known poll that tracks the percentage of dollar bulls and dollar bears. Neither poll has ever hit less than 3% in all the many years that it's been around. The dollar index now shows only 3% dollar bulls and has for a short while now.
By the time you combine all of these factors, the bounce on the dollar index is coming soon here.
Here ya go, TTR. This will help visualize the way wave counts unfold in a series.
At the left, we have a full 5 wave impulse series to the upside. Notice that at the top, a divergence always occurs on the MACD between waves 3 and 5 to show that the run is getting weak and that a reversal is about to occur. This ALWAYS occurs at the end of a 5 wave series. I have yet to see an exception to this rule in EW theory. This happens because Wave 3 is the strongest, which produces a top peak on the MACD. Then we get a Wave 4 retrace which makes the MACD pull back. Then we see a final 5th wave to the top which is much shorter than Wave 3 and weaker so it produces a lower MACD peak.
That 5 wave series took place after a multi-year downturn in the dollar index. If we were to go back further, I could show you how the larger 5 wave series to the downside also produced a divergence between the final 3rd and 5th waves.
Ok, so we have 5 waves up in an impulse series. That move up is a larger Wave 1. EW theory says that we should now get a corrective series of waves for Wave 2 before the larger Wave 3 to the upside begins.
To figure out reasonable targets, we have to understand the psychology behind each type of wave. A Wave 1 move to the upside almost always produces a strong movement back to the downside that can retrace up to 100% of the original movement up. Typical fib targets are 61.8 and 76.4. Also, 78.6 comes into play. But extensions beyond these can also occur.
Wave 2 retraces typically occur in what EW theory calls a Zig Zag. A Zig Zag develops in 3 waves whereas the original move up was 5 waves. The reason it unfolds in only 3 waves is because it is a counter-trend movement to the bigger trend. In other words, the overall trend for the dollar index on a larger scale is up...3 waves down is only a correction. So a Zig Zag is described as an ABC movement rather than a 1-2-3-4-5 movement.
A Zig Zag looks like a lightning bolt and usually develops inside a trend line channel, which is what we have on the chart currently.
Now we need to understand the form of a Zig Zag. Zig Zags develop on a smaller level into a 5-3-5 wave count. In other words, Wave A will be 5 waves, Wave B will be 3 waves (which is also a small ABC movement) and then Wave C will develop into a final 5 wave sequence with a divergence at the end.
On the chart, we can see where we can easily count 5 waves down, then a 3 wave correction back up. That takes care of Waves A and B. The current downtrend is Wave C. Inside that wave, we have a large extended 3rd Wave. We recently had a nice bounce which takes care of Wave 4. The difference between Wave 3 (which is the most powerful) and Wave 4 helps produce the ending divergence we see between Waves 3 and 5 on the MACD at the bottom.
Now, we are finishing up the final 5th wave. This last wave down won't be nearly as strong as what we've already seen. In a Zig Zag formation, Waves A and C will be related to each other in a fibonacci-based mathematical way. They can be equal, which is common, or one can be shorter than the other and can form a .618 relationship to the other wave. Other combinations can occur as well but they always adhere to the fib levels in the A to C relationship for length.
In this case, Waves A and C are trending toward equality. At the point where they will become equal, we will intersect the bottom parallel channel trend line yet again. And we will have the final divergence necessary on the MACD to indicate that we have completed the 5th wave.
Another clue to this puzzle is the basic fact in EW theory that states than Wave 2 cannot exceed the beginning of Wave 1 price action. So, the absolute bottom for this movement, even if it went to extremes, is about 74.22 since that's where Wave 1 began.
If we tie this in with current negative divergences on charts like the DOW, we can see where it is topping as well.
One more fact to consider....there is a well known poll that tracks the percentage of dollar bulls and dollar bears. Neither poll has ever hit less than 3% in all the many years that it's been around. The dollar index now shows only 3% dollar bulls and has for a short while now.
By the time you combine all of these factors, the bounce on the dollar index is coming soon here.
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