The dollar caught a bid at the .236 Fib line of the rising red channel last night.  This also represented the .500 Fib retracement (green) of the drop from 84.595 to 80.615 and, more importantly, the .618 (white) of the drop from 88.90 to 72.86 that began in Jun 2010.

The dollar intrigues me in the way it acts as the canary in the coal mine for all the fear and greed associated with so many markets.

DX spiked as SPX was tumbling towards 1266 in Jun 2012, then again as it initially failed to retake the .786 of the 1422-1266 plunge.

When SPX recovered and went on to new highs, DX plunged — especially when the Fed announced another round of QE in Sep 2012.  It made our top call at 1474 nerve-wracking.  Clearly the markets thought QE would trump the biggest Bat Pattern completion ever!

It spiked modestly when SPX tumbled to 1343 — obviously thinking the drop was manageable.

TRADE UPDATE: 10:44 AM

I’ll take an interim long position if we break 1678 (for protective purposes.)  This is probably just a stop-clearing exercise to weed out weak shorts.  Remember, our target date is Monday.  Core short position still in place.

THE DOLLAR, CONTINUED…

It settled back down as SPX recovered from 1343, but got increasingly nervous as SPX approached 1553/1555 — the completion of the Crab Patterns set up by the 1370–1074 plunge in 2011 and the 1474–1343 correction in the fall of 2012.  DX hit its peak about the same time SPX was testing the previous all-time high at 1576.

I was quite bearish at this point, and can well remember the fear present in the marketplace (for those of us who shorted then, it was more on the greed spectrum.)

DX bottomed in early May as the euro and the yen both slid at the same time and SPX tagged the trend line connecting the 2000 and 2007 highs, reaching an interim high as SPX topped out at 1687.  And, this is where it got weird.

I had shorted at 1687. From an equity fear/greed standpoint, I was looking for a rise in the dollar as the market sold off.  The dollar had just topped July’s 84.25 high.  Having just completed a Bat Pattern in April (purple grid), it was well on its way to completing a Crab Pattern up at 87.66.  Why, as stocks were melting down, was the dollar following along?

The answer came courtesy of the yen, which caught a bid when the USDJPY tagged both the .786 of the 110–75 decline that began in Aug 08 and the midline of a price channel going back forever (yellow, dashed line below.)

As a result, USDJPY broke down from a wicked-steep acceleration channel it had been in since August 2012, spurring an avalanche of short-covering by yen bears.  As USDJPY found channel and Fib support in mid-June, SPX’s rebound from the initial 1687–1598 plunge ran out of steam.  The combination of the two sent the dollar soaring again.

But, when SPX found another bottom at 1560, the dollar kept rising.  From 1560 all the way to 1654, the two rose in lock-step.  I considered this quite normal, as SPX was closing in on the .786 retracement of the 1687–1560 decline at 1560.

Then along came Wednesday and Bernanke’s little chat.  Within a few seconds of the dollar index closing on the ICE, someone started buying up eminis like crazy.  Later, the talking heads would explain that Bernanke had allayed fears of tightening — i.e. raising interest rates.

This was insane, as no one in their right mind ever equated tapering or even ending QE with a Fed directed increase in interest rates.  And, there was no change in the previously discussed plans for QE other than the wording that was, if anything, stronger regarding its end (by the year’s end.)

The emini buying was enough to break through resistance and initiate a marvelous ramp job that boosted SPX to the .886 the following day.

By the time the poor dollar re-opened several hours later, the damage had been done.  It gapped down and has been holding on for dear life.  It found support where it should have, and is waiting to see whether stocks are really going to ignore the obvious Bat Pattern reversal opportunity.

As our study pointed out yesterday, this has not occurred in the past six years of trading.  No other well-formed Bat Pattern of this size has utterly failed to register even a blip at or near the .886.  And, even those that made a very modest retracement reversed from a double top back to the .886.

So, I think it’s worth taking the chance that this is a slight overshoot of a Bat Pattern .886 that will reverse on Monday.  If I’m wrong, and it hits 1687 first, odds are we’ll be even or ahead of the game after a pullback from the double top.

I’ll be updating the forecast Saturday afternoon.

GLTA.