25 Sep 2020 ● 07:39 AM
Everyone who did not understand the recent market rally from the lows in May has one thing figured out. The dollar index has been the primary reflection of liquidity and any bounce back is being taken as a reason to sell across asset classes. The recent bounce in the DXY is very small from a historical perspective or based on the retracement done. It achieved the top end of a rising channel near 94.50 as discussed several days ago. The question here is similar. Was this bounce still wave 4 or is it a larger degree wave 2. The recent bounce is a-b-c and done or only wave A of a bounce back, we may not know for sure but we should head lower from this level in wave B or 5 down.
The long-term trend of the dollar is bearish and therefore after every 3 waves up I would look for bearish alternates first. I expect the dollar to head back to 93.12 near the lower end of the rising channel/flag. If that level breaks it may signal that another impulse down has started, we can figure out which wave in the structure later.
The second chart is the weekly chart of the DXY, presuming that we end up closing positive for the month and a 5 wave decline is already complete. Then the recent bounce was 23.6% in wave 2. Such a small retracement in a strong trend can happen. After the recent a-b-c up move above we can start wave 3 down longer-term as well. If that happens then wave 3 down longer-term has started and we are heading toward 83.50 in the next 6 months. This is an important conclusion that can get lost in all the noise around the dollars advance and the risk in markets. The only question you have to answer is where will the dollar's wave 2 bounce end? Is 23.6% enough? We do not know that now. But if the above a-b-c bounce is over and results in an impulsive decline then wave 3 down long term has already started.