I know that I tend to bang on a bit about the FLD (Future Line of Demarcation), but it is an extraordinarily important line. When I saw this tweet on Wednesday I knew that we were at an important level in the markets:
To understand just how important, here is a chart showing that the 40-week FLD has provided support for the past two and a half years:
The only time that the support has been breached was when price dropped into the 18-month cycle trough of October 2014.
Should we expect the 40-week FLD to continue to provide support? I don’t believe so, in fact I think it is very likely that the 40-week FLD will soon be broken to the downside and will then provide resistance until the next 18-month cycle trough, which I expect to occur early next year.
For those of you familiar with the sequence of price and FLD interactions that informs the FLD Trading Strategy, here is that sequence with the 40-week FLD:
There are several points to make about this:
- The A-category interaction is where the 40-week FLD provided support to price in November 2012. It is an unusual A-category interaction because there is no price cross over the FLD, but it is not an impossible A-category interaction. It is an indication of the strength of the bull in the markets at that time.
- The B-category interaction (which occurs as expected at the time of the 40-week cycle trough) is a perfect example of price finding support at the level of the FLD, followed by the C-category interaction where price bounces off the support of the FLD.
- The D-category interaction (also as expected at the time of the 18-month cycle trough) is a cross down below the FLD as expected, but it does not fulfill its target to the downside before bouncing up, another indication of the bullish underlying trend. The fact that price drops further below the FLD than it did in November 2012 indicates that bull is beginning to weaken.
- The E-category interaction gave us a good run up to the second peak of the M-shape of the entire A-H sequence.
The next interaction is of course an F-category interaction which is a strong cross down below the FLD. This is why I don’t expect the FLD to continue to provide support. After that price cross to the downside the FLD will provide resistance until the next 18-month cycle trough.
It is a further indication of the weakening of the bull that the 40-week FLD has been tested more frequently recently:
That is likely to continue as each fall in price comes down harder onto the support. Soon the 40-week FLD will be breached, and we will remain below the FLD until early next year.
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