Future Line of Demarcation – 20 October 2012 16


We have been very busy this week making information about our FLD Trading Strategy available. If you enjoy analyzing markets according to Hurst’s Cyclic Principles but wonder how you can move from analysis to trading then you absolutely have to look at the FLD Trading Strategy.

The FLD is one of the cyclic tools that Hurst defined. It is an acronym for Future Line of Demarcation, and it is extraordinary how appropriate that name is. Mostly we focus on times when price crosses the FLD, but there are as many times in the natural development of a cycle when the FLD demarcates future price movement by providing support or resistance, often with uncanny accuracy.

In honor of the public appearance of our FLD Trading Strategy I’m going to take a look at how the FLD has demarcated price action this week.

S&P 500

The US markets demonstrated further quickening of the pulse as discussed last week, shooting upwards until Thursday, then falling strongly on Friday. Note how the S&P 500 just poked above the 20-day FLD but then was dragged down by it. That is exactly the FLD and price interaction that one expects preceding the formation of a longer cycle trough, and we are expecting the 20-week cycle trough to form soon. I expect that 20-week cycle trough to form below the trough of Monday 15 October 2012, and must point out (at the risk of sounding like a stuck record) that I don’t expect the bounce out of ┬áthe 20-week cycle trough to be as bullish as one might expect. In particular I don’t expect the bounce upwards to last for anything like half the cycle wavelength (in other words ten weeks).

Resistance at the mid channel pause

Nasdaq

The Nasdaq presents an even clearer picture of how the FLD provides resistance prior to the formation of a longer cycle trough. Here too the 20-week cycle is expected to form a trough soon.

Bouncing off resistance

Euro/US Dollar

The Euro provides a great example of the FLD in another role: that of providing support.

Providing support

This sort of price and FLD interaction is often seen around the first 20-day cycle trough following an 80-day cycle trough which is exactly what is happening here.

Gold

The FLD works just as well upside down! In Gold we can see how the FLD provided support going into the peak. I expected price to stretch further above the FLD at the actual peak, but it didn’t have the strength.

Broken support

As Gold forms the first 20-day cycle peak following the 40-week peak of 5 October 2012 the FLD is expected to provide resistance (an inverse of the situation in the Euro).

30 Year US Bonds

Bonds couldn’t muster any further rise, and so last Friday’s peak seems likely to be the 80-day cycle peak that we have been expecting. Note here how price didn’t even manage to get above the FLD, and the FLD perfectly demarcated the price action as it turned down from the peak.

Perfect demarcation

Crude Oil

The FLD picture in Crude Oil is not as clear as it is in the other markets we have looked at, and that in itself is useful information because it can help us to resolve the analysis. You will know that recently I have been considering two options in Oil: the possibility that the 80-day cycle trough occurred in late August and is a straddled trough, or that it formed on 3 October 2012 as presented in this chart:

Helping to resolve an analysis

The key to resolving which of these analyses is correct will be in the way that price interacts with the FLD over the next week or so. If the FLD provides support for price (as it has in the Euro) then the October trough will win the day, if not then the August trough will be confirmed, and we will expect a drop in oil prices into the 20-week cycle trough.

US Dollar Index

The FLD has provided a remarkably accurate demarcation for the US Dollar over the past two weeks, including a period of support surrounding the 20-day cycle trough, then leading price down into the 40-day cycle trough which most probably formed this week on 18 October 2012, and then acting as a magnet and pulling price up out of that 40-day cycle trough.

A cyclic roadmap

That’s it for this week. The FLD is a remarkably powerful tool, both for analysis and trading. If you haven’t yet discovered our FLD Trading Strategy then take a look at how the FLD can be used for trading.

Have a great week, and good trading!

 


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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16 thoughts on “Future Line of Demarcation – 20 October 2012

  • tom russo

    Gotta hand it to you david. When all the talking heads on CNBC here in states was saying 1500, 1600 blah blah blah you were saying bearish intermediate

    and the cycles win again!

    thnx as always

    • David Hickson Post author

      Thanks Tom
      Sometimes it is lonely being a contrarian, but in Italy I can always turn off the new feeds and contemplate next week’s olive harvest, which helps me to focus on the cycles!

  • tom russo

    could one use the FLD of the cycle they are trading as opposed tO the 20

    that is, should one only use the FLD of the cycle they are trading?

    • David Hickson Post author

      Yes indeed you should use the FLD of the cycle that you are trading. However I have discovered that not all cycles all equal – the FLD Trading Strategy uses the 20-day cycle because it works consistently. Other cycles have their quirks, which you need to get to know.

  • Marco Fortuna

    Hi David,
    If I trade a cycle says of 20 days using as signal the 20 days FLD, I lose part of the profitable price moviment.
    I belevied to understand that in some cases we can anticipate the entry using a FLD of the cycle shorter.
    This is particular true in the case of FLD cascade patterns but if I don’t have a FLD cascade pattern do I necessary use the FLD of the same cycle I’m trying to trade or in some cases (which ?) I can use FLD of cycles shorther ?
    Furthermore, how many cycle shorter ? The software give me several entries based on VTL or FLD of the same cycle or shorter than the cycle I want to trade.

    Thanks a lot

    Marco Fortuna

    • David Hickson Post author

      Hi Marco
      You are absolutely correct that trading the FLD means that you miss some of the move – half of it in fact. And as you say you can use a shorter cycle to get in earlier and capture more of the move, which is what Hurst’s original trading methodology was all about. The million dollar question is how much shorter a cycle should you use? Sentient Trader takes the approach that Hurst took which is to consider all possible options, and then you choose a level that matches your confidence in the analysis, and provides you with suitable profit potential relative to risk. There is always a trade-off between getting in early and profiting from more of the move, and getting in too early and being stopped out, and therefore having a lower win ratio.
      The FLD Trading Strategy takes a different approach: instead of worrying about having missed half the move we simply focus on profiting from the half of the move that remains.

  • Karl

    David, I have ST showing Oct 12th as the 20w low looking at the 80d and 20w cycle. What do you think about the rally early last week as the rally out of the 20w low, but given the downward pressure of the other cycles, we’ve already seen the high? Does it make sense that we’d see the high of the 20w cycle in the first 10w, and the first 5w, etc? That would indicate a very bearish setup, but I would think that we’d see that type of cycle shape going into a 18m (or greater) low.

    Additionally, you’ve shown the EUR/USD analysis often, with the 18m low to come. However, I use the USD, which ST shows an 18m low on 14 Sep. I still maintain that the correlations between the dollar and all other markets (at least from a US perspective) have a rising dollar leading to declining prices of basically everything else. Have you seen this in the pat where the USD may have bottomed prior to all the components bottoming (given the USD is weighted with multiple currencies) or does commonality generally drive a single combined low?

    Thanks again for the great update!

    • David Hickson Post author

      Hi Karl
      I think it is possible that the 20-week cycle trough occurred last week around the weekend of 12-15 October in the S&P 500, with the Nasdaq forming a trough a week or so later, but I would be surprised to see the peak of the new 20-week cycle occurring only four days into the cycle – that is very bearish as you point out, and a bit too bearish I think. More likely is that this thrashing about is still part of the complex peak forming process and that we should see a bounce for at least two weeks or so (there is an interesting correlation here with the possibility that we are in an Elliott wave 4, with the bounce out of the 20-week cycle forming wave 5).
      With regard to the commonality between the US Dollar and other markets I don’t expect them all to have single troughs unless the magnitude of that trough is of at least 18 months, in which case one more often finds single troughs (such as last October). My experience is that the 20-week turns that we are seeing now will be scattered 10, 20 or 40-days apart, which makes the relationships between the markets more complex, and more challenging to analyze.
      I hope that helps.
      David

  • Jeffrey Young

    David,

    How do you pin a trough. What is the exact procedure. I have trough pinning enabled but I can’t sem to figure out how to actually move a trough’s position.

    Thank you Jeffrey

  • Jeffrey Young

    Hello David,

    I have been trying to make my chart look like yours. I noticed that your June 4th 40 week cycle diamonds are not filled while mine are (why?). I did successfully pin my 80 day cycle trough to 08/24. The problem is the recent troughs. On your chart the whiskers have turned to diamonds for the most recent 5 day and 20 day cycles while mine are still whiskers no matter where I try and pin them. They are also superimposed with question marks. I have tried pinning the previous shorter 10 and 5 day cycles backward clightly but nothing seems to work. Everything else looks similar to your chart except for the cycle pattern since October 1st. Just wondering how you got the whiskers to diamonds for th elast 20 day and 5 day cycles. David, thank you for your timeand response in advance. By the way, your new video about the FLD and wanting to spend more time with my family really struck a chord with me. Thank you for the inspiration to continue this quest.

    • David Hickson Post author

      Hi Jeffrey
      Trying to match analyses down to the very fine detail you are describing can be a frustrating process. Differences between analyses are usually subtle, and are caused by slight differences in data, by differences in the nominal model, by differences in pinning and by different analysis periods. The analysis process is very complex and involves fairly extensive fuzzy logic, which is why this happens, but the good thing is that generally the differences do not have big implications. We can resolve many of these differences, and any differences after that are probably not worth worrying about.
      My analysis period for the S&P 500 starts on 24 June 2002. My data is from KineTick EOD via Ninja Trader. An interesting subtlety is that I am in Italy and the time zone on my data might be different to yours – this sometimes causes subtle differences. The reason my 40 week cycle trough is hollow is because I pinned that trough months ago, and have never deleted the pin. Sentient Trader regards pinned troughs with some skepticism (even when I’m doing the pinning), and it will ignore a pinned trough if it causes an analysis anomaly.
      I hope this helps.

  • Rajiv

    The 20d FLD training videos show a continuous 20d FLD drawn from the 80d trough. By default, the 20d FLD does not go that far back. Is there a special command available to draw the 20d FLD to trade the 20d FLD strategy?
    Thanks.

  • Robert

    With regards to the Euro, ‘this sort of price and FLD interaction is often seen around the first 20-day cycle trough following an 80-day cycle trough which is exactly what is happening here’. I assume you mean as price moves down into the first 20-day cycle trough, which could explain what happened this week.
    However, I also follow your Live Analysis Euro charts, and until today, they had the 20-day cycle trough as already having formed. So trading the 5-day cycle, for the past few weeks, the underlying bias has been wrong. Last week the bias was bearish, and this week it was bullish, so completely opposite to what occured.
    In fairness, the projection boxes still made some good calls, which I find interesting considering where the charts had placed the 20-day trough.
    So how would someone trade the 5-day cycle this past few weeks. Do you simply trade the 5-day FLD if Sentient Trader is confused with the analysis on different timeframes, and ignore what it says is the bias.
    Finally, tomorrow could you comment on this sideways Euro movement recently, and whether it fits in with the placement of the 18-month trough in July. Have you considered what might happen to this analysis, if the Euro starts to track the S&P500 as it did a few years ago, and your S&P500 analysis is correct and we are heading down. What currently is a slightly bullish Euro analysis, could quickly turn very bearish if you move that 18-month trough. And this again brings me back to actually trading with Hurst Cycles. Can you actually trade these cycles even if the analysis is completely wrong, as the analysis is only ever proven right, long after the fact.

  • Hyok Kim

    “The FLD picture in Crude Oil is not as clear as it is in the other markets we have looked at, and that in itself is useful information because it can help us to resolve the analysis. You will know that recently I have been considering two options in Oil: the possibility that the 80-day cycle trough occurred in late August ….”

    Did you mean ‘late May’ by ‘late August’?