ST Outlook – EURO/US Dollar 16 September 2011

Current 40-day cycle status: RISING, Day 5 of Wave One.

The EURO/US Dollar forex pair continues to offer some fascinating analysis puzzles. In last week’s ST Outlook I discussed the probability that the forthcoming 40-day trough would be synchronous with an 18-month cycle trough.

EURUSD moving up

This week price formed the 40-day trough on Monday 12 September, at 1.3498. Price has since started rising out of the trough, and the 5-day, 10-day and 20-day FLD’s have been crossed as well as the 5-day VTL, confirming that the trough on Monday was at least of 20-day magnitude. As 32 days passed between the previous 40-day trough on 11 August and this trough on 12 September it seems very likely that this was indeed the 40-day trough (only 2 days short of the average length of 34 days). As can be seen in the chart above, the 40-day cycle is expected to push prices up to a level a little below 1.50.

However when a trough which has a strong magnitude such as this one occurs (per our discussion last week, it is expected to be a trough of the 18-month cycle), and particularly when it apparently occurs very early (only 462 days or 15.2 months have passed since the last 18-month cycle trough on 6 June 2010), it is important to review the analysis and be absolutely confident before acting on the basis that the long cycle trough has been formed. I am confident that this is a trough of the 40-day cycle, but is it really also a trough of the 18-month cycle?

When reviewing the analysis there are two issues which lower our confidence:

  • This trough is 84 days early for an 18-month cycle trough, and so could there be another 80-day cycle yet to play out before the 18-month cycle trough actually occurs?
  • Price is still above the 18-month FLD. While it is not absolutely required that price form a trough below the FLD, this is a definite warning sign that we might be premature in calling this 40-day trough also the 18-month trough.

Here is a weekly chart showing the current analysis:

Weekly chart

Notice how price has not fallen below the 18-month (yellow) FLD. There is something else that is evident and that is that the 40-week trough on 10 January 2011 also occurs above its FLD (pale green line). Price does cross below the 40-week FLD in mid February, and then crosses back above it in late March. Is it possible that in fact the trough of the 40-week cycle should be placed in this period (at the low of 14 February)?

Placing the 40-week trough in February would also resolve the very short 20-week cycle from June – August 2010. Here is what this analysis looks like:

40-week trough in February

At first look the analysis is not as satisfactory as the earlier analysis, because the most prominent troughs are troughs of shorter cycles, and note the straddled 20-week trough in October 2010. This leads to several “inverted” cycle shapes around the beginning of this year as can be seen when we look at the daily chart:

Daily chart

However note that the forthcoming nest-of-lows for the 18-month cycle, now expected in November/December 2011 is much more “vertical” which implies that the cycles are all playing out much closer to their nominal lengths, and so that indicates that this is possibly a better analysis. In fact when we look in detail at the price trough in January this year it was a very quick dip to new lows, and looks very much like what Hurst called fundamental interaction – when “fundamental” news or events distorts the price movement for a brief period, after which price bounces back to where it “should be” according to the cycles. This fundamental interaction lasted for only 4 or 5 days, and then took another 4 or 5 days to bounce back.

And so what does this alternate analysis tell us about what is happening in the market at the moment? It tells us that the trough on Monday 12 September was not only a trough of the 40-day cycle, but also a synchronous trough of the 80-day cycle, and that there is one more 80-day cycle to play out before the expected 18-month cycle trough.

80-day trough on 12 September

In conclusion I get to wax lyrical (again) about one of the greatest benefits of trading according to cyclic principles, and that is what I like to call the “robustness” of the process. And that is explained in the answer to the question: “What is the difference between the two analyses discussed here, in terms of making trading decisions?” The answer is that there is very little difference! If you compare the first chart in this post to the last chart (above) you will see that the difference is only a matter of degree:

  • Our initial analysis projected a move UP to a little under 1.50 (because it is rising out of not only a 40-day trough, but an 18-month trough)
  • The second analysis also projects a move UP, but to a level of only about 1.42-1.44.

And so why is trading using cyclic principles “robust”? Because no matter which analysis turns out to be correct, a long trade on the 40-day cycle is appropriate. As the price move develops one would set profit-protection stops in case the latter analysis turns out to be correct. If the former analysis turns out to be true we would be positioned correctly to profit from the stronger move that will follow the 18-month trough.

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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