Bitcoin (BTC): Hurst’s methodology in technical analysis (2)

That we use cycles on market prices? How to use them? Cycles are a separate method of technical analysis. Cyclic methods are generally more or less complex and little used by the general public. In our previous publication, we introduced the principle of Hurst’s cyclical analysis: What is the Hurst cycle in technical analysis?. Our analysis essentially dealt with the price of bitcoin (BTC) since 2017. Thus, the objective was essentially the construction of supports and resistances with cyclical criteria. Next, we showed how moving averages and cyclical modeling can tell us about inherent market trends. We will see in this second publication other cyclical indicators developed by the engineer JM Hurst and his disciples. The use of cyclicality in current bitcoin thresholds is a good illustration of this methodology.

Cycles and Symmetry: The Power of Market Regularity

A regular market is, by definition, predictable. It is necessary to distinguish the immutable cycles from the variable cycles. Immutable cycles, like the cycles of the planets, are set in time. It is then possible for us to project with sometimes disconcerting precision the movement of the stars into the very distant future. Markets have a varied logic.

Thereby, markets control variable cycles. That is to say that the period of these cycles, their amplitude or their temporality, can vary more or less. Furthermore, it will be important to note that the variability of the cycles is itself suitable for cyclic logics. However, the analysis of the cycles at a moment allows us to project prices with certainty into the future. This forecast reliability then depends on the variability of the cyclic parameters. Since the end of the 1980s, we have also observed that the variability of cycles has increased on many markets. A major explanation would be the distortion of the price system by States and central banks.

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As an example, above we have represented a graph only according to cycles. This chart represents the combination of only 9 cycles (including 3 others on the daily candles). From then on, we notice that a limited number of cycles nevertheless already makes it possible to reach an extremely detailed level of realism. Indeed, this synthetic chart uses most of the rules of technical analysis: double bottom/top, supports/resistances, targets, candles, etc. However, it is by no means a random model.

Therefore, probabilistic price modeling is not a unique method and does not offer most of the advantages of cyclical modelling. Cyclical price modeling makes it possible to take into account the dynamic nature of the marketwhich does not necessarily allow the study of probabilities.

Hurst’s “Future Lines of Demarcation” (FLD)

Although the notion can be relatively complex, the methodology provided by the engineer JM Hurst in the 1960s is extremely relevant. Therefore, these cycles were probably set to recur in the future (amplitude, time). To confirm his hunch, he gave birth to a known indicator FLD to set time and price targets and understand the cyclical dynamics of the market.

FLD”: theoretical principle

The future dividing line (“Future line of demarcation is a principle of technical analysis based on the regularity of cycles. This principle was reworked by Christopher Grafton in his book Mastering Hurst Cycle Analysis. Indeed, this principle is combined with the other analysis criteria set by Hurst. This method makes it possible in particular to apply bullish or bearish impulses. In addition, this method is relatively very relevant for setting objectives. The theory is as follows…

For Hurst, the price of an asset is cyclical. Thus, each price cycle of an asset (between two low points) should therefore theoretically repeat itself in the future. The diagram opposite illustrates this property which allows us to postpone the observed cycle in the future. To form the FLD, one first selects the price history of the last cycle that one brings back from a half period in the future. Here, the period of the main cycle is 6.3 which therefore translates to a half period of 3.15. This symmetrical and spaced curve at the price in the future by half a period is named FLD (“Future line of demarcation “).

In this way, we know (theoretically) that the crossover between the price (in black) and the FLD means that the price cycle is at half its potential amplitude. As a result, it is deduced that the theoretical price target is equal to the height that separates the crossover point from the previous lower on the price cycle. By plotting the amplitude on our graph, we effectively obtain a target slightly greater than 1 in our case. The same pattern is applicable on the downside.

Observation of FLDs: in practice…

Sometimes, this system can be extremely effective in detecting cycle reversals. Still, let’s imagine for a moment what it moves in a sharply bearish market. In a strongly bearish market, the price evolves durably below the FLD: there is a “cascade” phenomenon. That is to say, all the FLDs of the different cycles are indicated on the downside, without ever crossing the price. This cascading phenomenon where the FLD is permanently above the prices demonstrates the disconnection of the market with its historical evolution.

Conversely, in a trendless market (Trading Range), the FLDs of the different cycles will intersect permanently. This reflects the presence of a multitude of more or less long bullish and bearish objectives which reflect limits to the progress of the course.

Finally, today we have not withheld historical statistical studies that allow us to decide on the effectiveness of FLDs. Nevertheless, most practicing analysts and authors, as well as in a personal capacity, have observed great relevance of this method. The advantage of studying FLDs is to have, within the framework of the other Hurst indicators, a combined objective of time and price.

FLD and Bitcoin (BTC)

To make our point concrete, we propose to study bitcoin retrospectively and currently. In the graph opposite, on a represented in black the course of the bitcoin. Subsequently, we graphically replicated the evolution of the price of bitcoin in the future according to the dominant cycles of 1.6 years and 1.2 years. Clearly, we have carried past bitcoin prices half a period into the future. This allows us to highlight bitcoin’s 1.6-year (blue) and 1.2-year FLDs. We can then make an observation as to the evolutions to be expected.

We note with rigor that the crossover point between the 1.6-year FLD and the price of bitcoin occurred at the end of December 2021 at $44,600. In theory, the final price target is equal to the height difference between the last high and the crossover point. Considering the Spring 2021 high, this would bring our price target to 44,600 – (63,400 – 44,600) = $25,800. However, taking a closer look at the last high in the fall of 2021, this would bring our downside target to 44,600 – (66,950 – 44,600) = $22,250.

In terms of time targets, it was possible to reach the first threshold by June, then the second target, by September 2022. The support at $25,800 in May has been confirmed and the essential for l t is time to stay above this threshold. However, it is important to remember that the major 2.5 year cycle remains bearish.

Finally, it is important to remember that the 4-year moving average is around $22,230! This 4-year moving average, which roughly also corresponds to the period of the BTC major cycle, is an absolute threshold. Historically, every major bitcoin low is around or on the 4-year moving average. The fact that the long moving average corresponds to our lowest target demonstrates the market’s ability to be directed towards key price thresholds for the time being.

In conclusion

In short, we have seen that cycles require great mathematical and technical rigor. Financial cycles are significantly more exposed to the “variability” parameter than so-called natural cycles. That is to say that the parameters which produce the cycles are more unstable over time (excluding variability correction). However, this still allows precise and detailed cyclic analysis criteria to be established using mathematical and technical tools.

In this sense, the example of bitcoin tends to show that we would have already made the majority of the downward movement. The first bearish target given by the FLD at 1.6 years was validated in May. The next target would be around the 4-year moving average, which is also a major historical threshold for bitcoin.

In this context, JM Hurst notably formalized the FLD principle for the future demarcation line. Although a relatively complex concept to grasp, FLDs are often of great relevance. It is above all a question of deferring the current price to the future according to the major cycles of the asset. The purpose of this method is to be able to decide at what level of amplitude and time the asset is located. This method allows the construction of objectives within the framework of a broader cyclical analysis: What is the Hurst cycle in technical analysis?

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Thomas Andrieu

Author of several books, economic and financial editor on several sites, for many years I have developed a real passion for the analysis and study of markets and the economy.

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