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JM Hurst 1, The Federal Reserve 0

X Motivation

Is there anything more powerful moving markets today than the Fed? Time and time again this behemoth of central banks causes powerful spikes and volatility on announcements.

Yes there is.

It is the ‘X motivation’ cyclical motion described first by JM Hurst in his ‘Profit Magic of Stock Transaction Timing’ classic and later in the cycles course. Cycles can be skewed, squashed and swamped but they never disappear. Through the cyclical tools we as Hurst analysts can upwrap the layers underpinning market motion. Yesterday there was an excellent example of how the Valid Trend Line (VTL) can be used as powerful knowledge to enter a great short trade.

There was due to be a ‘FOMC’ statement published last night (UK time) which had the potential to move markets. Lets look at how in this case the VTL predicted the subsequent move down just before the announcement. In this case we will look at the DJIA in detail and I will also give a more general example in the DAX. In each case the timeframe is 1 minute and the cycles in question are the intraday 160 minute and 5 hour.

Overview

VTL_demoClick on image to view larger version

1. THE SETUP

A 5 hour trough occured on this setup just before 16:00 UK time yesterday. The day had been fairly bearish so far so I watched the climb up into the first 160 minute cycle (2:1 harmonic ratio with the 5 hour) with interest. A trough formed in the 160 minute cycle at around 18:30. The cycle shape was neutral to bullish. A VTL could now be drawn between the two cycle troughs (orange line). The first trough point was shifted to the right at about 16:15 to avoid price intersecting the VTL – one of the rules of valid trend lines. Here is the crucial point:

If MEDIAN price crosses the VTL from above a 5 hour PEAK is confirmed.

2. THE CROSS AND ENTRY

Median price strongly crossed the VTL at around 18:50, ten minutes before the FOMC statement was due, confirming a 5 hour peak in price at around 17:10. This is extremely powerful information as a Hurst trader. Effectively you know even before the world’s biggest central bank is due to announce its thoughts on interest rates etc. that median price cannot break the previous peak, now confirmed as a peak of the 5 hour cycle.

VTL_demo2Of course at the point of the announcement volatility ensued and price highs did break the previous peak. However it is median price we are interested in. It has a good attempt at breaking the peak but could not overwhelm that ‘X motivation’ pushing down. Such a setup enables a tiny stop and a huge risk reward ratio for the alert Hurstonian! So, a short entry was entered into with a stop above the spike at around 19:00. Since there was around 165 minutes gone in this 5 hour cycle the price action following this entry was either going down or sideways for another 160 minutes or so. The underlying trend was down so the probability in this case was strongly down.

3. THE RESULT

VTL_demo3The chart above shows the entire 5 hour cycle which bottomed just after 21:00 UK Time. The DJIA had fallen over 320 points in that time, a great profitable trade to get in on which had a duration of around 150 minutes. As a matter of interest the trade was exited on a break of a downward sloping 1 hour VTL, not shown here.

COMMONALITY IN THE DAX

As mentioned at the start of this article this VTL cross also occured in most other markets worldwide. This is Hurst’s principle of commonality in action, intraday. Here is a general example of the DAX with 160 min (orange line) VTL shown.

VTL_demo4Here the statment from the FOMC didnt even persuade price to get its highs above the 5 hour peak. Again, a great shorting opportunity, given the correct knowledge about the true nature of market motion.

TIPS ON INTRADAY VTL SETUPS

Trading intraday using Hurst Cycles is not for the faint hearted and you must have a complete knowledge of the subtleties involved. An experienced analyst will be able to perform a quick phasing with just a few measurements. Underlying trend must also be taken into account. Here are some helpful tips:

  • Ensure the correct placement of the VTL. If price is intersected when drawing the line from the first trough, move it to the next available low in price where a clean VTL can be drawn.
  • There is an art to VTL crosses. I always like to see a strong cross by median price. If median price bounces around the VTL I do not consider this a cross, especially on smaller timeframes.
  • Always consider underlying trend. This particular example was late in the 1 day cycle (one cycle degree larger than the 5 hour) so the probabilities for a strong move down were high.
  • Price can cross a VTL in a valid manner and the subsequent price movement can go sideways for the remainder of the larger cycle. This often betrays an underlying trend in the opposite direction to the VTL cross, be careful!
  • VTL setups like the above example occur all the time on all timeframes in all markets. However, a valid trend line requires a solid and informed phasing analysis to push the probabilities of success in the trader’s favour.

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