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March 18, 2015, 11:30 a.m. EDT

Is it possible the dollar will only get stronger?

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About Avi Gilburt

Avi Gilburt is author of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition. A lawyer and accountant by training, he is also managing member of Gilburt Financial Services, LLC, which provides financial markets analysis and consulting. His Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he is a certified contributor, and TheTechTrader.com with Harry Boxer.

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By Avi Gilburt

“The dollar will never come down.” This has now been the sentiment of market participants for quite some time. This is the most common statement I hear about currencies, in addition to "the euro is dead." It is amazing how quickly this market has turned on its head.

For some time now I have felt that we would see parity in the euro and the dollar, and well, here we are, and we are just about at parity. At the point of parity, we will likely see a correction/consolidation which will last for at least a month or two, and take us back toward the 92-95 region, before the dollar continues its climb.

In late 2014, week after week, there were calls that the dollar was about to crash. Week after week I heard that "shorting the euro is just silly." However, when it became clear that we were in the heart of a 3rd wave rally, I warned anyone who would listen that the dollar is not a market to short. I kept noting that this was one of the strongest charts on the planet, and you should never short within the heart of a 3rd wave. They provide extension after extension, and go further than most believe. This heart of a 3rd wave has even gone beyond the targets I had expected, and suggests that the ultimate target for the U.S. Dollar Index /zigman2/quotes/210598269/delayed DXY -0.04%  will likely be at least the 111 region, and that seeing 120 within the next 12-18 months is not out of the question. But not likely before we see a wave (4) pullback.

I would like to digress a moment to address the dollar vis-à-vis the expectations of the masses as it relates to quantitative easing. You see, most market participants are wrong about how a market will react to a specific event. That is why most traders who attempt to trade a news story based upon the content of the story will often find themselves on the wrong side of a market move, while those who take note of the market reaction to that event are usually the more savvy of traders. Markets do not often react to news as the great majority would expect, and this is exactly the story of the dollar and quantitative easing.

The entire market "reasonably" assumed that the quantitative-easing programs would be the death knell to the U.S. dollar. Everyone assumed that the flood of liquidity would devalue the dollar to levels never seen before. As usual, everyone was wrong.

Back in July of 2011, I wrote one of my very first financial-analysis articles. In that article, I called for a long-term wave 2 bottom in the dollar, which would set off a multi-year 3rd wave rally. While I also called for the 2011 drop in the equity markets at the same time, I did assume that the drop would have been worse than we actually experienced. Within six months, I had to shift perspectives and become quite bullish in the equity market, looking for new all-time highs. However, I remained quite steadfast on my long-term dollar bottom call. And, yes, everyone thought me to be quite crazy making such a call in July of 2011.

Now, after many QE programs, in addition to Operation Twist, the dollar has clearly not rolled over and died. Rather, we are simply following through in what the market told me it was going to do back in July of 2011. And, yes, most market participants who expected the "obvious" death to the dollar have been proven wrong.

This brings me to a quote from Ralph Nelson Elliott, which he penned in 1941, that really explains the effect of exogenous events upon a market trend, despite the "common think" to the contrary:

"The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed."

So, as the dollar climbs higher and higher, we now hear some people ridiculously whispering about the Fed having to engage in further QE to bring the dollar back down. However, it is clear that these people are not burdened by the facts. Further QE will not impact the dollar, and the dollar is destined to higher levels later this year no matter what the Fed does or does not do.

As for my more immediate expectations, the next resistance region in the DXY now resides between 101.50 and 103.50. I am going to expect that the DXY will top within that region, and then take us back toward the 92-96 region. We should really be within a week or two, if not even within days, of beginning that wave (4) pullback toward 92-96. But make no mistake about it. As Elliott noted, the long-term progress of this dollar cycle is up, and it will not be affected or subverted by exogenous events. The Fed has proven to be powerless to cause the death to the dollar, even with an abundance of QE, despite the "common think" to the contrary. Ultimately, we will be seeing a much stronger dollar over the next year. But, the parabolic stage of the rally is nearing its end.

See charts illustrating wave counts on the DXY.

US : U.S.: ICE Futures U.S.
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Jan. 28, 2022 4:59p

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