A Future Line of Demarcation (FLD) is a replica cycle plotted half a wavelength forward in time from the original cycle. If you can picture a semicircle representing a cycle, the FLD is a copy of that semicircle overlaid on the original, but offset forward. In effect, there are now two overlapping semicircles.
The job of Hurst cycle analysis is to back-engineer the composite cycle (i.e., the price action we observe over time on the chart) and resolve it into its constituent cycles. The goal is to find their troughs and peaks, then determine our position within the cyclic scheme at the lower right edge of the Bitcoin chart below. An FLD can be generated for any cycle in the nominal model. Among other things, the interaction between price and FLDs allows us to estimate the future time and price of peaks and troughs, and to gauge future trend direction. The following examples should clarify this.
In
the Bitcoin chart, a 20-week FLD has been generated by offsetting
a line to the right of price at each date by half the wavelength of the
20-week cycle (the wavelength is 22.7 weeks, as shown at the bottom
right of the chart, so the offset is 11.3 weeks). The FLD is an exact
duplicate of the original price line.
Bitcoin's 20-Week Cycle and FLD (from June 2021 to January 2022).
The horizontal arrows stacked down the left-hand side of the chart show the offset in action. You might notice a slight difference between the FLD inflections and the original price; this is because FLDs use the median price (high + low)/2. Notice also that as the FLD falls in future time, for example in August, the price is rising at that time; and as the FLD rises in future time, for example in December, the price is falling.
The primary use of the FLD in the Hurst Cycle notes service will be as a target measurement tool and to confirm the magnitudes of recent peaks or troughs. Let's start at the 22 June diamond stack marking the time location of the 40-week cycle trough. The 40-week cycle is represented by a light green diamond, and our cycle of interest, the 20-week cycle, is the dark green diamond just below it in the stack. The arc of the entire cycle has been plotted, and the next trough is estimated to occur in the last week of January 2022.
The origin price is the 22 June low of 23,894. Price rallies with the new 20-week cycle and meets the falling 20-week FLD on 7 August at 43,546 X(1). With these two pieces of information, we can now estimate an initial target for the 20-week cycle peak. We do this by subtracting the origin price from the FLD cross price and then adding the difference to the cross price. This generates an upside target of 63,198, which turns out to be 92% of the actual peak price, which came in at 68,789 on 10 November. The reason the FLD projection fell a bit short is covered in the next section.
Now, let's consider the downside target. Using the 10 November peak as the new origin price (68,789), price falls and meets the rising 20-week FLD on 24 December at 50,918 X(2). Subtracting the FLD cross price from the origin price and then subtracting the difference from the cross price generates a downside target of 33,047 (the actual low was 33,184, i.e., a little lower).
Next, we are looking at the 20-day cycle and 20-day FLD in the E-minis chart below. The start of the 20-day cycle is the low of 20 May (3,807.5).
E-minis 20-Day Cycles and FLD (from 20 May to 21 June 2022).
Price rises to meet the FLD on 26 May at 4,012.8 X(1), generating an upside target estimate of 4,218.2 (as a reminder, we subtract the origin price from the cross price and add the difference to the cross price). The actual peak came in somewhat lower at 4,202.2. Why it undershot should become clearer when we examine the downside leg, but basically, it's because the 20-day cycle was under downward pressure from longer, falling cycles. When FLDs either exceed or miss their targets, it tells us something about the bigger picture.
It gets interesting on the downside leg now because price is actually falling into a major low, that of the 40-week cycle trough. In real time, this would have appeared on the chart as a nest of lows shown by circles and whiskers. We would have known the magnitude of the upcoming trough and been prepared for a sharp sell-off into it.
The origin price for the downside leg is the 4,202.2 top, and prices fall to meet the rising 20-day FLD at 4,053.95 X(2). However, this only generates a downside target estimate of 4,053.9, which is clearly too short. In real time, you would have expected a price overshoot to the downside because of the looming big trough and not just randomly closed out at X(2). You would have needed to step up to the next longer cycle, the 40-day FLD. So, let's look at that now.
For the downside leg, the origin remains the same as for the 20-day cycle at 4,202.2, and price declines to meet the rising 40-day FLD at 3,913.0 X(2), providing a downside target estimate of 3,623.7. The actual 40-week cycle trough came in at 3,661.5.
The origin price of the 40-day cycle is the same as that of the first 20-day cycle at 3,807.5. Price rallies and crosses the falling 40-day FLD at 4,031.5 X(1), generating an upside target estimate of 4,254.7. This is undershot by 52 points, again because longer cycles are pressing price down into an upcoming 40-week cycle trough.
Summary: FLDs are replica cycles that help the analyst estimate targets and work out the magnitude of recent peaks and troughs. Theoretically, when prices cross up through a falling FLD, we are halfway to the peak. When prices cross down through a rising FLD, we are halfway to the trough. The influence of longer cycles on a cycle of interest can cause price to either undershoot or overshoot the theoretical target, providing us with useful information about underlying trend strength and direction.
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