ST Outlook Euro/US Dollar (14 October 2011)

Last week we identified the trough of 4 October 2011 as being a trough of either the 80-day cycle, or a trough of the 18-month cycle (the less preferred analysis). That was a mere 3 days after the trough had formed in price, and now, 10 days after the trough it has been confirmed of at least 80-day cycle magnitude. Here is the projection for the current 40-day cycle assuming that the trough is of only 80-day magnitude:

40-day cycle projections

Notice how the peak is expected fairly soon (within the first 20-day cycle) because of underlying trend. By comparison here is the 40-day cycle projection if the trough on 4 October 2011 turns out to have been a trough of 18-month magnitude:

Assuming the 18-month cycle trough

Notice how the peak projection expects a higher price target, and a greater range of time for the peak – because the underlying trend is upwards the peak is expected later.

And so what was the magnitude of the trough on 4 October 2011? Of course as price develops the picture will become clearer, but let’s take a look at the evidence we have available to us now. First of all the FLD levels:

40-day cycle projections

Median price has crossed FLD’s up to the 40-day cycle level, and looks poised to cross the 80-day cycle FLD (although of course anticipating an FLD cross is a dangerous thing to do!) This confirms the trough as being of 40-day cycle magnitude, and because of the phasing analysis of shorter cycles, it must be of at least 80-day cycle magnitude. When could we use FLD levels to confirm that this was an 18-month cycle trough? The 20-week and 40-week FLD’s are up in the 1.42-1.44 level for some time, and the 18-month FLD (yellow line) is below price, exposing a fundamental flaw in the proposition that the 4 October 2011 is a trough of the 18-month cycle. While it is not absolutely required that price forms a trough below the FLD of the cycle which is producing the trough, it is preferable. This factor greatly reduces the odds that the 4 October 2011 trough was a trough of the 18-month cycle.

However the markets are never perfect, which is what makes them so fascinating to analyze and trade. There is a strong argument in favor of the trough on 4 October 2011 being a trough of the 18-month cycle, and that has to do with the shapes of the cycles:

Well formed cycle shapes

Cycle shapes are of course the field of theory that Sentient Trader adds to Hurst’s Cyclic Theory, and it recognizes that the shapes that cycles take in a particular instrument tend to be consistent (under particular underlying trend conditions).  I have marked on the above chart the 4 wave legs of the two 40-week cycles that would make up the 18-month cycle from June 2010 until 4 October 2011. You can see that the two cycles are well formed, with only the wave 3 move from May to August this year (marked with a red arrow) looking poorly formed. However this poor definition of wave 3 is in fact within the character of the EURUSD pair. Here by contrast are the cycle shapes that are formed by assuming that the trough on 4 October 2011 is of only 80-day cycle magnitude:

Inconsistent and poorly formed cycle shapes

As can be seen these cycle shapes are not nearly so well-formed, but more importantly they are not consistent with the cycle shapes that form the EURUSD forex pair, in particular the distorted wave 4’s (marked with red arrows) are not consistent with typical wave 4’s in this instrument (looking at the market characters we have compiled going back to 1975).

And so the cycle shapes imply that the trough on 4 October 2011 was of 18-month magnitude, although the FLD picture implies that we have another 80-day cycle due to elapse before the 18-month cycle is formed. As the current 40-day cycle emerges we will be able to use the shape of that cycle to provide further evidence one way or the other.

Two weeks ago I wrote:

The only reason for going long at the forthcoming trough would be to “hedge our bets” in case this trough is in fact an early 18-month cycle trough (as discussed two weeks ago). I am keeping an eagle eye on this analysis, and as the current fall in price develops the cycle shape is beginning to look a little like a potential plunge into an 18-month trough, but it is still too early in my opinion, and so this is the less likely phasing situation.

I am pleased to have “hedged my bets” because the rise of the Euro in the past week is looking very much like the bounce out of an 18-month cycle trough. It is rare that one can be 100% confident in a particular analysis, but often the difference between two analyses is one of degree instead of absolute price direction, as is the case at the moment in the Euro/ US Dollar forex pair.

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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