US DOLLAR HAS COMPLETED FIVE-WAVE DECLINE AND IS DUE FOR A BOUNCE WHILE THE EURO LOOKS TOPPY -- THAT FITS INTO A DOWNSIDE CORRECTION IN STOCKS AND COMMODITIES -- SO DOES THE RALLY IN THE YEN

DOLLAR DUE FOR A RALLY ... On August 17, I wrote a message showing that the CRB Index had completed a five-wave advance and was due a correction (which appears to have started). The following day I did a similar analysis showing that the U.S. Dollar had completed a five-wave decline and was due for a rally. Chart 1 is an update of that mid-August chart. The boxed numbers show a clear five-wave decline from its March peak to its August bottom. Adding to my more optimistic view on the dollar was the positive divergence in its 14-day RSI (blue line). I've pointed out before that a positive divergences takes on more meaning when it coincides with the completion of a fifth wave. I also pointed out in mid-August that the dollar decline had coincided with rallies in stocks and commodities. That being the case, it would be logical to expect a dollar rally to coincide with pullbacks in the other two markets.

Chart 1

DOLLAR INDEX AT CHART SUPPORT ... Another reason to expect some buying in the Dollar Index is because it's in an area of potential chart support at its December low (Chart 2). At the same time, the Euro is starting to weaken from major resistance near its December high (Chart 3). That makes the Euro overbought and the dollar oversold. In order for a short-term trend reversal to occur, however, the Euro needs to break its August low and 50-day moving average, while the Dollar Index needs to clear its August high and its 50-day line.

Chart 2

Chart 3

A CLOSER LOOK AT CURRENCY ETFS ... Charts 4 and 5 give a closer look at both currency ETFs. Chart 4 shows that the PowerShares US Dollar Bullish Fund (UUP) needs a close over 23.68 to turn its short-term trend higher. Its daily MACD histogram bars have been showing positive divergence since June and are now above their zero line (a positive MACD crossing). Chart 5 shows the Currency Shares Euro Trust (FXE) needing a close below 140.42 to turn its short-term trend lower. Its daily MACD histogram is turning down. Most other foreign currencies (the British Pound, and the Aussie and Canadian Dollars) are also starting to look toppy. While that's helping the dollar, it's helping the yen even more.

Chart 4

Chart 5

YEN AS A SAFE HAVEN ... One of the signs that global traders are turning more defensive is when they start moving money back into the yen. It's no surprise then to see that the yen has rallied against the dollar since the start of August (Chart 6). The yen is also rallying against the Euro. The orange line in Chart 7 (FXY:FXE) shows the yen versus the Euro since the spring of 2008. The yen surged against the Euro from last August to this February as global stocks (green line) fell. A global stock rally since March coincided with relative weakness in the yen. The yen, however, is now starting to gain ground on the Euro (and most other currencies). I take that as a sign that global traders are turning more defensive on stocks and are using the yen (and the dollar) as potential safe havens.

Chart 6

Chart 7

NOTHING HAS CHANGED SINCE MID-AUGUST... Nothing that I've written over the past few days is different from what I wrote in mid-August. On my return from vacation on August 17, my first headline read: "...GLOBAL STOCK AND COMMODITY CORRECTION MAY BE STARTING AS DEFENSIVE MONEY FLOWS INTO THE DOLLAR AND TREASURIES". I ended my second August 17 message with the following lines: "A number of technical (as well as seasonal factors)...warn of more turbulence over the next month or two. Hopefully, that will result in a better buying opportunity for stocks in the September/October period. In the meantime, safe havens like the dollar, the yen, Treasury bonds, the VIX...should do better. Short-term traders should take some stock and commodity winnings off the table." All I've been doing since then is repeating that same message.