Support and resistance levels in the markets are most commonly considered as static price levels, breadcrumb trails left behind by previous troughs and peaks. But one of Hurst’s cyclic tools provides dynamic support and resistance – not levels, but lines that provide moving support or resistance. These lines are the Future Lines of Demarcation (FLD), and they provide support or resistance in a particular way: price straddles the line, the high of the bar above it, the low below, and it “tracks” along the FLD.
As the media this week attributed almost every up and down move in the markets to the unfolding Cyprus situation it was interesting to observe that far from anything unusual happening in the markets, they were simply responding to some particular FLD configurations.
The S&P 500 was held in an FLD “bubble” (that’s my technical term for it) between the 20-day FLD (purple line) and 40-day FLD (blue line) as can be seen here:
On Friday that bubble closed, and price resolved to the upside as expected (because this is a B-C interaction with the 40-day FLD – see the FLD Trading Strategy) as price bounces out of an early 40-day cycle trough. A bit more of a bounce is expected, but keep in mind that the upside targets for this move are close to being fulfilled as discussed last week.
The Nasdaq had a similar, although more bearish situation involving the 20-day and 40-day FLD’s. Both FLD’s were providing resistance to price. Here too further upwards action is expected, but the bearish way in which price has been hanging below the FLD’s warns us not to expect too much from the bounce (calculate the target from Monday’s low through the purple 20-day FLD for example) . If price manages to break above the 40-day FLD next week that line will provide an important level to watch for the move down.
The Euro has been approaching the 40-week cycle trough and here the 40-week FLD has been providing dynamic support for the past three weeks. According to Hurst’s original work the trough of a cycle usually forms below the FLD, but the extensive study of how price interacts with FLD’s that resulted in the FLD Trading Strategy has revealed that half the troughs of the cycle that an FLD is based upon actually form at the level of the FLD (or above it), which is likely to be the case here.
Gold has been making heavy weather of the move up to the 20-week cycle peak, which I have suggested previously might not be a very impressive peak. The green line on this chart is the 20-week FLD. The 20-week cycle peak is expected to form at that level or higher.
30 Year US Bonds
Here is the 20-week FLD in US Bonds which is providing resistance (bonds spent the week tracking along the FLD) as bonds form the first 40-day cycle peak following the 40-week cycle peak of 27 February 2013.
Crude Oil has also been constrained by two FLD’s, although this is technically not a “bubble” because of the configuration of the FLD’s. The 20-week FLD has been providing an ascending resistance level for three weeks, and this week price came down to the 20-day FLD. Price is expected to bounce up from the 20-day FLD as Crude Oil continues to climb out of the 18-month cycle trough of early March.
US Dollar Index
The US Dollar has been in the grips of a strong dominant cycle of at least 80-day magnitude. This has the effect of causing the shorter cycle troughs to form higher than would be expected, not below, often not even at the FLD level, but well above it. Price might be forming a late 40-day cycle trough now, but more likely is that the 40-day cycle trough formed last week. The big question now is whether the dominant cycle that has been pushing the dollar up is the 80-day cycle, or a longer one. If it is the 80-day cycle then we expect the dollar to fall directly into the 80-day cycle trough, leaving behind a clear 80-day cycle shape. If the dominant cycle is longer then price will bounce up from the 40-day FLD and continue rising to the peak of the dominant cycle. Price action around the 40-day FLD will answer the question soon enough.
There is an interesting observation I’d like to make from a fundamental perspective this week. The Cyprus situation is being generally regarded as negative for the Euro, but the cycles indicate a turn up for the Euro, perhaps promising a resolution to the Cyprus situation that will be perceived positively. As a cyclic analyst you often don’t need to wait for the news to know how it will affect the markets!
Have a great week and profitable trading.