The index structure shows an opportunity to buy commodities

The Dollar Index ($USDX) has been showing five waves since the 1/3/2008 low, which will provide many signals in the marketplace. Below is a monthly chart of the dollar index

$USDX Monthly Elliott Wave

The monthly chart above shows the progression of the five waves from 01/03/08 and the different degrees within the cycle. The idea is overall bullish for USDX. However, there are two possibilities for the dollar index. It may soon make a significant correction and fall sharply to correct the entire cycle. Alternatively, it is simply correcting the cycle since the 01/02/2018 lows and continuing higher.

At EWF we have found that the most significant advantage of the theory is the understanding of the sequence. Every time wave five appears there is a clear right side and consequently opportunities. As we can see in the chart, there have been five blips in blue since the 01/03/2008 lows. This gives $USDX buyers a temporary warning. It has also reached a 61.8% to 76.4% Fiboancci expansion between (I) and (II), which is usually an area where wave five can end. As said, there are two results. The first is the classic pattern in Elliott Wave theory, shown in the table below:

Elliott wave impulse and zigzag cycle


The chart above shows that after five waves, a major sell-off in the dollar may soon occur. If we downgrade the cycle since 01/02/2018, it seems like waves IV and V are missing. But that takes away the market‘s warning that the dollar may soon decline.

The second scenario assumes the same lows on January 3rd, 2008, the index shows the same five waves. But in this case we call them five swings, which is a huge difference. The following graphic shows the structure:


The diagram above shows a WXY structure. It combines two cycles of three waves or two ABCs in Elliott Wave Theory. In this second scenario, the index should finish swing five behind the lows on 01/02/2018, but the pullback should be smaller than in scenario one.

Professional traders understand the entire market and are always looking for the instrument that has clear structures. They then look for buy/sell opportunities, which we call Elliott Wave hedging, meaning that both sides of the market (ie buyers and sellers) agree on a reaction. Looking at the USDX structure and analyzing both scenarios, a USDX pullback may be seen in 2023. However, the Elliott Wave structure clearly shows that the higher degree right side is bullish. The index should be supported for a long time. Commodities lead the USDX pairs and trade in the second dimension when they agree on the swing direction but not the overall direction. It can be seen in the graphic below:


Monthly $USDX charts overlay with $XAGUSD (Silver); As we can see, the metal should not trade below zero and has held the lows while the USDX is close to a top. Understanding and reading the market makes a huge difference when it comes to being on the right page and knowing which instruments to trade.

Conclusion: 2023 could see USDX pullback, meaning higher $EURUSD, $AUDUSD, $NZDUSD, $GBPUSD and higher commodities. Commodities should hold stronger versus the $USDX and offer a better buy into 2023.

Comments are closed.