The FLD Bounce – 4 May 2013 2


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.

S&P 500

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.

Bouncing at the 20-day cycle trough level

Nasdaq

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. 

Reaching not Bouncing

Euro/US Dollar

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. 

Bouncing off temporary support

Gold

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.

Finding temporary support

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. 

Support eventually ends

Crude Oil

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.

Bouncing at the 20-day cycle trough

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.

When a bounce fails

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!


About David Hickson

I have been trading for over 20 years, but only had any success after discovering Hurst's cyclic principles. Unable to find any software to speed up the analysis process I created Sentient Trader software, which now pretty much does all the analysis for me. I am a film maker and a TV director, but nowadays I mostly provide consultation services to professional traders and fund managers, helping them to integrate Hurst analysis into their trading. I'm South African and live with my family in Italy.


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2 thoughts on “The FLD Bounce – 4 May 2013

  • Robert

    David,

    Could you please comment on what I’ve been reading from you, over the past year since I found your reports. Back then, and for the duration of that time, you were saying the US markets would fall strongly into an 18-month trough, but instead they continued higher.

    Now it appears you have accepted that the 18-month trough has formed, but not how you expected it to. Does this make you feel frustrated with the analysis, and looking at your long-term charts, does that 18-month trough fit within the Hurst framework.

    Knowing what you do now, would your analysis of the US markets have been any different in your weekly reports, if you were to do it again. Has trading the FLD trading strategy, also moved your focus more to what’s happening currently, rather than what might happen in the longer-term future.

    Thanks.

    • David Hickson Post author

      Hi Robert. The recent 18-month cycle trough did not form in the way I expected, but it does fit within the Hurst framework, in that it doesn’t break any rules or produce any anomalies. The only issue with the shallowness of the trough has to do with what it implies in terms of the longer cycles – which is that there is more bullishness than I expected in those longer cycles. To be honest I don’t find it frustrating – I enjoy the challenge of analyzing the markets, and find it constantly fascinating. If the market didn’t turn up a few surprises and prove me wrong it would probably get a bit boring. I always maintain that analysis and trading are two separate activities, and as you say the FLD Trading Strategy is focused more on the shorter term (trading price interaction with the 20-day FLD), but more importantly it provides me with a disciplined and sensible approach to trading that doesn’t allow my “thoughts” or “feelings” about the market to get in the way (not too much anyway!) Using the FLD Trading Strategy we traded our way into the 18-month cycle trough, and out of it, thinking at the time that it was a 20-week cycle trough. When it turned out with retrospect to be an 18-month cycle trough that didn’t really matter. It highlights the difference between analysis and trading. As a trader I want to be profitable, and couldn’t really care whether I am right or not, whereas as an analyst I would like to be right! If I could write all the blog posts again I would have been right all the time. It’s a nice thought, but not very realistic. If there’s one thing that I do get better at as I hone my analysis skills, it is realizing that I cannot always be right!