What Diagonal II’s tell us about the Dollar – an Elliott perspective

A Diagonal triangle type II (Diag II to the upside, Diag II to the downside) is an Elliott Structure, discovered post Elliott, which breaks all three of his rules. These are:

1) Wave 2 cannot exceed the origin of wave 1

2) Wave 3 is never the shortest, and usually the longest

3) Wave 4 can not overlap wave 1

A typical Elliott Bull Market structure looks like this: You will see all the rules above are followed, and also note that the market is a fractal, meaning each 5 wave structure subdivides into another 5, from the multi-century to the tic chart.

In a Diag II however, sub-divisions are still 5-3-5-3-5 (corresponding with waves 1-5) just like an impulse wave, but now wave 2 can exceed the origin of 1, wave 4 overlaps wave 1 by definition, and wave 3 is often the shortest.

Diag IIs are found in the “a wave” and/or wave 1 and occasionally in wave 1 of a long wave 3. They indicate the beginning of a long move, as opposed to Diagonal Triangles (Diag >), which sub-divide into 3-3-3-3-5 and signal dramatic reversal ahead. Once its wave 5 is complete, it swiftly retraces at least to where it began (the first touch point of the Diag II, its wave i).

Here is what the Dollar Index looks like. As you see after the completion of wave I = v, we must retrace to at least the first Diag II at 73 on the index. Furthermore wave II can exceed the origin of wave I, meaning a possible new low for the Dollar.

Some other observations are that wave A will likely just exceed the red dashed line just above 80, before rebounding, followed by a drop past 73 in 5 waves. The retracements targets are met in a stair step fashion.

Finally, we begin to soar to a new high in wave III. When there are two or more Diag II’s as we see here, they compound the trajectory, meaning the Dollar should be back to a par with the Euro within 12 months and continue higher for at least the subsequent two years. So while it will appear like the stimulus package is debasing the Dollar short-term, just the opposite will occur, with the dollar soaring until the Fall of 2011.

Eduardo Mirahyes

Exceptoinal-Bear.com