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U.S. Dollar: a Classic Price Pattern You’ll See Again (and Again)

Why the price action of the U.S. Dollar Index conformed to what was expected

by Bob Stokes
Updated: October 22, 2019

Classic technical price patterns become "classic" because they are often recognizable in financial markets over time.

Consider the Elliott wave pattern called the ending diagonal. Frost and Prechter's Elliott Wave Principle says:

A rising ending diagonal is usually followed by a sharp decline retracing at least back to the level where it began and typically much further.

With that in mind, let's review EWI's analysis of the U.S. Dollar Index, starting with this chart and commentary from our Sept. 27 U.S. Short Term Update:

dxc092719

The [U.S. Dollar Index] rallied to 99.308 today, a few ticks shy of 99.370, the high on September 3. ... The next multi-week move in the U.S. dollar should be a decline, whether it starts from today's high or from a slightly higher high. ...

Well, the U.S. Dollar Index did climb only slightly higher and the next significant move has indeed been a decline.

The Oct. 18 Short Term Update said:

dxc101819

The current behavior in the U.S. Dollar Index is exactly the type that should develop after the completion of an ending diagonal pattern: a swift retracement of the entire pattern. Prices are progressing lower in an impulse wave from the 99.667 high on October 1. ... Near term, the index has closed lower 7 out of the past 8 sessions, creating a compressed decline.

By contrast, a currency strategist focused on "fundamentals" instead of technicals as a reason for the greenback's rise and then fall (Bloomberg, Oct. 18):

"One of the things that kept the U.S. dollar supported broadly over the past few months was the idea of uncertainty in Trump's policies," a currency strategist said.

Progress on trade talks this month "took the edge off" the dollar.

But EWI's analysts were informing subscribers of the developing ending diagonal well before the latest "progress on trade talks."

And, right now, our analysts are discussing specific price targets for the U.S. Dollar Index.

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