Time to love the dollar?

One of the most fundamental of JM Hurst’s Cyclic Principles, the Principle of Synchronicity states that troughs are synchronized (where possible) whereas peaks are not.

When considering the analysis of a forex pair however, in which price is actually the relative price between two currencies, this principle begs the question: “which way is up?” In other words, should the troughs of the first currency be synchronized, or the troughs of the second currency?

Let me explain this dilemma:

  • If one looks at a chart of the EURO in USD terms, (eg 1 EURO = 1.44 USD) then the troughs are troughs in the value of the EURO (see Figure 1)
  • But if one looks at exactly the same relative price movement in a chart of the USD in EURO terms, (eg 1 USD = 0.69 EURO) then the troughs are troughs in the value of the USD (see Figure 2)

And so: Which troughs should be synchronized? The troughs of the EURO or the troughs of the USD?

I have proposed previously that currencies have periods of “dominance” in which their troughs are synchronized, whereas the troughs of the other currency are not (because of course their peaks are synchronized). I further believe that dominance tends to move between currencies, and that there are periods when one currency is “dominant” , and periods when the other is “dominant”. Furthermore the transition of dominance between currencies is a gradual one, and there is some time when the troughs of both currencies appear to be synchronized as dominance shifts from one to the other.

If this all sounds horribly complicated, it need not!  With Sentient Trader one can perform an analysis both ways (synchronized troughs or synchronized peaks) and compare the results (better analysis ratings indicate the likely dominance). Or one can simply perform a standard analysis (synchronized troughs) with two sets of data, one favoring each currency.

I believe that we are presently in the midst of a shift of dominance from the EURO to the US DOLLAR, and interestingly both analyses (synchronized troughs in the EURO, and synchronized troughs in the US DOLLAR) are saying exactly the same thing:

The EURO is about to turn down, and the US DOLLAR is about to turn up. It is time to love the dollar again!

Let’s take a look at some charts:

Figure 1: Troughs in the EURO

Figure 1: Troughs in the EURO

The first chart (above) is the chart that I expect most Sentient Trader users would be familiar with, the price of the EURO relative to the US DOLLAR. A few quick points about the chart:

  • The chart is a median-line weekly chart (the median price of each week is plotted as that orange line)
  • The data is provided without any decimal point (and so 14440 actually means 1 EURO = 1.4440 US DOLLAR). I use this data because the data provider (Sharenet) also gives this currency pair “upside down”

Now let’s talk about the analysis:

  • The most recent trough of the 18-month market cycle occurred in June 2010.
  • Price is now in the second 40-week market cycle of the current 18-month cycle, and in the first 20-week of that 40-week market cycle.
  • The peak of the current 20-week market cycle is due very soon (I have shown the 80-day FLD Pattern Projection boxes which will be synchronized with the 20 week peak and trough)
  • The next trough of the 18-month market cycle is due in October this year, and the above-mentioned peak is likely to also be the peak of the 18-month cycle, which means that price will probably not exceed this peak on its way down to the trough in October.

So of course the big question is: when do we expect the peak of the current 18-month market cycle? Because of the above-mentioned Principle of Synchronicity we know that peaks are notoriously difficult to pin-point, however we can use the concept of underlying trend to help us. The stronger the underlying trend is, the later we would expect the peak.

And so: How strong is that underlying trend? Here is where some cracks start to appear in this analysis. Take a look at the previous 18-month cycle (from November 2008 to June 2010):

  • First of all the shape of Wave One (Sentient Trading methodology) is absolutely horrible.
  • The 40-week trough (in August 2009) is completely obscured.
  • Most problematic of all: the cycle shape is a contradiction. The peak occurs in the second sub-cycle, indicating a positive underlying trend, but the level of the second trough (June 2010) is lower than the level of the first trough (November 2008), indicating a negative underlying trend. This is a problem which should not be ignored.

And so it is fairly hard to determine what the current underlying trend is (although it would seem to be upward) because of these contradictions in the analysis. When contradictions like this occur in an analysis, one should consider other options. And so because this is a forex pair, let’s consider the possibility that the dominance of this currency pair is shifting (I believe that dominance has been with the EURO for several years).

Here is a chart of the US DOLLAR, relative to the EURO:

Figure 2: Troughs in the US DOLLAR

Figure 2: Troughs in the US DOLLAR

This is also a median-line weekly chart (which is why the left-most 54-month trough appears displaced, as the lowest median point was a week before the lowest low price).

Notice a few things about the analysis:

  • The first 18-month market cycle (April 2008 to November 2009) is a fairly well shaped cycle (including a beautiful example of a straddled 40-week trough in December of 2008). There is a subtle contradiction in that the first peak (November 2008) is slightly higher than the second peak (February 2009), whereas the second trough (November 2009) is higher than the first trough (April 2008), although the contradiction is subtler than the contradiction we found in the EURO.
  • The next 18-month trough is due very soon (in fact the 20-week FLD Pattern Projections are indicating that a synchronized trough is expected now)
  • The current 18-month market cycle appears to have a negative underlying trend (the peak of the first 40-week sub-cycle is higher than the peak of the second 40-week sub-cycle), which would imply that the final trough of the cycle should be lower than the first trough (at 0.6600), indicating the potential for further downside, although during a period of dominance shift subtle contradictions would seem to be the norm, and so the market does not need to fall to this level.

There is an alternate analysis worth considering:

Figure 3: An alternative analysis

Figure 3: An alternative analysis

This analysis indicates the likelihood of further downside for the US DOLLAR, but notice that the 18-month trough is expected in May, and that the accompanying synchronized “nest-of-lows” is very staggered, in that it spreads from May to November (18-month to 80-day). That is an indication of a poorer analysis (which is why I present it as an alternate), but it does remind us to be aware of the possibility of further downside.

In Conclusion

I believe that the dominance between the EURO and US DOLLAR is shifting from the EURO to the US DOLLAR. Further to that both of the above analyses suggest that the US DOLLAR is about to trough (and hence rise in value), and the EURO is about to peak (and hence fall in value)

Of course time will tell, but I believe that is what the cycles are saying!

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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