ST Outlook – EURO/USD

It has been an interesting week for the EURO / US DOLLAR forex pair, with the EURO moving down against the dollar, as forecast last week. The strength of this move has lead Sentient Trader to adjust its analysis by moving the (previously unconfirmed – it was a hollow diamond) 20-week trough from 12 July 2011 to an earlier position on 23 May 2011. The trough on 12 July 2011 is now phased as a trough of the 80-day cycle, resulting in a short 50-day cycle (which is 73% of nominal length).

The primary reason for the analysis change is not the fact that price moved down as it was expected to, but it is the nascent “plunge” quality of the decline. The decline is steepening, and the angle of the plunge into the trough has now exceeded the average plunge into a 40-day trough.

EURUSD Long Term

I have added bar counts to the above chart so that you can see how many days have elapsed since the most recent troughs of all cycles from the 18-month cycle down to the 40-day cycle. TheĀ current move down into the 40-day trough is now simultaneously the move down into the 18-month trough. As can be seen by the range of expected troughs, the “circle and whiskers” at the foot of the chart (those are the lines with circles in them), the analysis has all the shorter cycles currently running shorter than nominal, which is often experienced when approaching a long cycle trough, but can result in calling the trough too early, and so we will be careful to avoid doing that.

A rule-of-thumb that I have always used: If the “circle and whiskers” look a bit like the smoke rising from a train travelling from right to left on the chart then it is best to be cautious about calling the trough, and to use longer cycle FLD’s and VTL’s to trade. If on the other hand the train is travelling from left to right then one can afford to be more aggressive and use shorter cycle FLD’s and VTL’s.

EURUSD Medium Term

The medium term picture shows the recent compressed cycles that appear to have played out since the 20-week trough on 23 May 2011. The short 80-day cycle (actual length of 50 days) can be seen between 23 May 2011 and 12 July 2011. Any other analysis results in “inverted shape” cycles, where the intervening trough of a shorter cycle is more prominent in the price action than the actual cycle troughs. This does of course happen, and analyses which include “inverted shape” cycles are perfectly acceptable and usually unavoidable, but usually the better analysis is the one that has fewer “inverted shapes“. As a matter of interest the live analysis system is currently working with an analysis that includes these recent “inverted shape” cycles, an analysis which expects another 40-day cycle before the 18-month trough is formed.

EURUSD Short Term

The short term picture shows how price is still falling towards the 40-day (and synchronously the 18-month) trough. Price is approaching the bottom of the target box, and the time is ripe, but in moves into a strong nest-of-lows such as this one has to be careful of jumping in too soon and calling a trough. I have also plotted the 10-day FLD and 10-day VTL, which if crossed would provide evidence that the 40-day trough has formed. I would be reluctant to use the 5-day cycle yet, and would recommend using the shorter cycles for exits from short positions, but not yet for entries into long positions, until confidence in the analysis is stronger.

The change in analysis since last week gives me an opportunity to talk about what I call the “robustness” of a cyclic analysis. At the end of the day it not important to be absolutely right about the analysis, and to position the troughs of cycles with perfect accuracy. What is important is that one is trading on the correct side of the market (buying when the market is going up and selling when the market is going down). And this provides a perfect example of how cyclic analysis allows one to do that. Even though our analysis has changed in the last week, we were nevertheless positioned correctly in the market – expecting a downward move. The surprise has been in the direction we were expecting, which is of course a good thing.

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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