Of Hurst’s two cycle tools: the VTL and the FLD, I make no secret of the fact that my favorite is the FLD – the Future Line of Demarcation. I have written about it often here, the FLD Trading Strategy is based upon trading the interaction between price and the FLD, and in the Hurst Trading Room videos I bang on about it at length.
Many traders prefer the more flashy VTL, which gives one better entries and exits, closer to the turning points in the market. But it is much less reliable than the more mundane FLD. By the time the FLD gives a signal half of the move is over. As an eternal optimist (when it comes to trading the markets) I like to think of it as “half the move is still to come“.
Hurst used the FLD to project a cycle target when price crosses the FLD, but price crossing the FLD is only one of several ways in which the two can interact. Another way in which price and the FLD can interact is when price “bounces off” the FLD, which it did in most of the markets that we track here this week.
The most common time at which price will bounce off an FLD is at the trough of the cycle on which the FLD is based, following a trough of much greater magnitude. That is exactly what happened in the US markets this week. Following the 20-week cycle trough of 18 April price bounced off the 20-day FLD (purple line on the chart) at the time that the 20-day cycle trough was expected. Note how extraordinarily accurate was the support level provided by the FLD.
A variation of the same thing happened in the Nasdaq. But here price was moving so strongly that it did not come down to the level of the FLD. It reached toward the FLD, tracked along parallel to it (note the lows of Monday – Thursday this week), then bounced up. This is not actually a bounce, but what I call a “reaching” toward the FLD, a close cousin to the bounce.
There is another bounce that often occurs: after price has crossed an FLD it runs out of steam, and falls back to that FLD, finding support at the FLD. This is what happened in the Euro this week, and it is behavior that I have noticed often occurs at times of fundamental interaction. This week it happened at the time of the ECB announcement of interest rate cuts.
Another type of bounce occurs before price crosses the FLD, and this is what happened in Gold this week. Price approaches the FLD, and finds temporary support there before crossing it. Usually the support (or resistance) is short-lived, but sometimes it holds. Whether it does or not is dependent upon the relative strength of other cycles.
30 Year US Bonds
Bonds show a very good example of the type of bounce we are seeing in Gold. The 20-day FLD has been providing support to price as it moves up to the 40-week cycle peak (as discussed over the past few weeks). That support did prove to be short-lived as price crossed cleanly below the FLD on Friday.
Crude Oil shows another perfect bounce, of the type discussed when considering the S&P 500. Price bounced off the 20-day FLD at the time of the 20-day cycle trough, following a trough of greater magnitude (the 18-month or 54-month cycle trough of 18 April). Note again the extraordinary accuracy of the support level provided by the FLD.
US Dollar Index
The US Dollar is the one instrument that has not provided us with a bounce this week, but it did something equally important – a failed bounce. Last week we were considering the possibility that the trough of 17 April was of 80-day magnitude. When price crossed below the 20-day FLD on Monday, instead of bouncing, or at least finding temporary support there, that possibility was negated. Failed bounces can be as useful as successful bounces. Note also the very clear bounce in the third week of February.
The FLD is an extremely powerful tool, which is why we have built an entire trading strategy around it. The FLD is in essence a very simple line – it is simply price displaced into the future.
We are sometimes asked whether it is possible to plot an FLD using technical analysis software other than Sentient Trader. Of course it is possible, indeed very simple. I did it for years before I created Sentient Trader. The problem is in knowing how much to displace the price. The amount of displacement is determined by the current cycle wavelength – and that can only be calculated by performing a good Hurst cyclic analysis. The wavelengths of cycles are subject to constant variation (Hurst’s Principle of Variation), and so unless you are constantly adjusting the displacement of the FLD according to a quality phasing analysis, the line that you are plotting will be disappointingly, perhaps even dangerously inaccurate.
Have a great week, and profitable trading!