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Posted February 21st, 2006
The resilience of the short-term Dollar rally might have seemed impressive at first sight, but a more careful scrutiny of the technical picture reveals something else. The Dollar did not necessarily achieve much net progress since early February and whatever ground it was able to gain was gained on a backdrop of persistent momentum divergences and a wedging price action. Our first choice this week is that the ending diagonal triangle shown in the chart above is finished and that the Dollar Index is now engaged in a multi-day to multi-week test of / consolidation above 89.81-89.05 - as part of a larger minor wave B test of highs from the mid January lows. We're waiting for a price break below 90.17-29 in conjunction with a crack of the red RSI support line (please see the chart above) to deliver the final confirmation. Until that happens back-up resistance is located at 91.23-91.50.
In the daily time frame the prospects for only a temporary top demands we go up in our count by one degree. We are now working with the case that minor wave A down ended at 87.80, with the rally ever since a B wave test of highs that should challenge (and possibly exceed by a very slim margin) the 92.70 mid November highs in the coming 3-6 weeks. Once a wave B top forms, Dollar Index will be subject to a severe wave C downtrend towards 86.39-84.90, possibly 82.78-80.08. Overall there is no change to the idea that we are somewhere in the middle of an intermediate wave (B) retreat that retraces last year's wave (A) advance.
While our first option remains a downside resolution from this multi-month trading range, the running triangle alternate we have been discussing some while ago is more and more of a contender. Under this scenario wave D up has reached the low-end of its initial target range so the Dollar Index might well be vulnerable to a wave E retreat towards 89.32, possibly 88.21-88.67. Because the lower end of the target range for a wave b of B retreat under the main count (see the 240 min chart above) overlaps the upper end of the wave E target range under the alternate, distinguishing among the two options we have on the daily chart will be a tough thing to do. We will patiently observe and report what happens at that pivotal area just under 90 but for now the bullish option at intermediate degree is only an alternate potential.
A very interesting char to look at is the COMEX Gold futures contract. I am currently working with the case that a volatile wave 4 consolidation started off at the 578 high. The initial leg down should make it closer to 521.40, possibly 503.90 before a challenge of highs will get underway. This forecast depends on Gold's ability to hold below resistance at 559.20-562.60 on a daily closing basis and will be greatly bolstered upon a violation of key structural and fibo near-term support currently located at 546-551. If the corrective rally from 537.80 has already peaked, ideal projections for a wave .c downtrend are 534.70, 527.90 and 519.40. Popping above 563 (daily close) will announce that wave 4 was a shallower affair, nevertheless time consuming enough to keep the yellow metal in a trading range ABOVE 538 in the next few weeks.
In the oil market wave 4 signaled that a more time consuming pattern is unfolding, ideally a contracting (or symmetrical) triangle. Wave d up should now make it towards 65.85-68.15 before giving way to a wave e retreat around 60.90-63.40. Upon completion of this sideways wave 4, Oil should see resumption of its intermediate and long-term uptrends, with the next objectives located 84.33-87.80 / 98.71 (on a multi-month basis).