The VTL Squeeze – 7 February 2014 7

Hurst defined two cyclic tools – the FLD (Future Line of Demarcation) and the VTL (Valid Trend Line). I write a good deal about the FLD because I have found that to be the more reliable tool when trading, but the VTL can also be very useful, particularly for clarifying analysis, and this week an interesting formation has developed that I call a “VTL Squeeze”, when price is squeezed between two intersecting VTL’s.

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The 20-week & 10-day VTL squeeze

The two VTL’s are the 20-week VTL (the green dashed line), and the 10-day VTL (the pink dashed line). Interesting to note how price found support on the 20-week VTL this week, which is an encouraging sign that the VTL is correctly drawn because it has some “meaning” to the market, and therefore the analysis that produced the VTL is likely a good one. Price will inevitably break out of the “squeeze”, and so it is useful to understand what it means when price crosses a VTL.

When median price crosses above a VTL it confirms that a trough of the cycle one degree longer than the cycle the VTL is based upon has formed in price. And so when (and if) price crosses above the 10-day VTL we will have confirmation that a 20-day trough has formed in the market. That is not very exciting news for us unfortunately, because both the possible analyses we have been watching over the past few weeks indicate that a trough of at least 20-day magnitude must be forming now. Here is the option that expects the trough to be of only 20-day magnitude:

A 20-day trough this week

And here is the option that expects the trough to be of 40-day magnitude:

A 40-day trough this week

When (and if) price crosses above the 10-day FLD that confirms that the 20-day trough has formed, but it could equally be a trough of 40-day magnitude.

Much more interesting about this VTL squeeze is that 20-week VTL. When median price crosses below a VTL it confirms that a peak of the cycle one degree longer than the cycle the VTL is based upon has formed in price. And so when (and if) price crosses below the 20-week VTL we will have confirmation that a 40-week peak has formed in the market. Now that is more interesting, because we are expecting the next 40-week cycle trough to occur soon, either in about two weeks as shown in the first chart in this post, or some time in March as shown here:

A later 40-week trough

And so price crossing down below the 20-week VTL would confirm that the peak of the 40-week cycle has occurred. The peak must happen of course before the next trough, but must price cross below the 20-week VTL before the 40-week cycle trough occurs? No, it is not obligatory. The 40-week cycle trough could occur above the 20-week VTL, but it is more likely that it will occur below the VTL.

Is it possible that the 40-week cycle trough occurred this week? It is just possible, but it is unlikely in my opinion. There are three possible scenarios.

The most likely scenario is that the trough that formed on Monday (one could argue for Wednesday, but other markets formed troughs on Monday, and so I think that is the better place for it), was a trough of only 20-day magnitude. Price will probably bounce up to the 20-day FLD where it will meet resistance, and then drop down below the 20-week VTL on its way to the 40-week cycle trough.

The alternate option is that presented in the last chart above: price is bouncing out of a 40-day cycle trough, and it should cross cleanly above the 20-day FLD, reach up towards 1800, and then turn down, crossing below the 20-week VTL on its way to a later 40-week cycle trough.

The least likely scenario in my opinion is that the 40-week cycle trough occurred this week.

As the market action unfolds next week how will we know which scenario is playing out? First of all we can distinguish between scenario one and two because of the way in which price reacts to the 20-day FLD (the purple line on the charts).

  • If price finds resistance at the FLD it will be scenario one.
  • If price crosses clearly above the FLD then we will watch closely as it comes back to that FLD – if it crosses strongly below it again then scenario two will win out.
  • But if price then finds support on the FLD it will be the least likely third scenario that will win the day.

So one way or the other it all seems to come back to the FLD!

Have a good week, and profitable 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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7 thoughts on “The VTL Squeeze – 7 February 2014

  • Derek Frazier

    Well done.
    David, you have consistently been able to raise an accurate picture of where the market is at all times since I have been following… I have learned the most in my trading career from you.

  • Jonathan Santos

    Hi David. Considering that it is very useful to watch other markets (particularly emerging markets) to help clarify things, I would say with some confidence that my emerging market (ibovespa) made in october/13 a 80-day cycle trough while the 20-week trough was december/13. The sequence A-H is very clear with both 20-day FLD and 40-day FLD. 57 days have elapsed since the last 20-week trough, then it is very likely that the recent bounce up was due to the 40-day trough. I might be wrong of course but I think it worths considering that analysis. Unfortunately, I cannot load a screenshot to show you. I can send it by email if you wish. Never stop posting, David.