Ichimoku Kinko Clouds

Now lets look at an example where the market is possibly set to reverse - the Euro against the US dollar. Pushing up into the cloud for the first time since September. Analysis With the exception of a rather dramatic three days in early September, the Cloud has limited rallies most of the time. The Cloud itself was relatively flat in November because the highest price of the last 52 days was the early September high. Note also that the Cloud has been relatively fat throughout, but has narrowed starting 10 January. Kijun-sen (26-day MA) has flattened suddenly, having dropped very steadily for a long time. The moving averages themselves have crossed, caused by the strong rally of the 10 December, and are now approaching the bottom of the Cloud which should act as resistance. Added to the last two days of consecutive candles with long upper shadows in the middle of the Cloud, this hints that we are unlikely to break higher short term, but we will watch in February for a pote

The first example we will look at will be the German Dax stock market index. Dax Index You will see that the chart below contains many gaps, because, unlike the FTSE100 and DJIA indices, the Dax can (and will often) open away from the previous day’s close. The other two indices always open at the same price as the last close and will move up or down as bargains are struck in the different shares that make up the indices. Therefore we will not pay too much attention to these gaps in our analysis, only taking note of these when especially large gaps form, or when they are to be found around very important chart levels and patterns. In an uptrend with consolidation late July to October. Analysis As can be seen from the above chart, prices had been moving steadily higher since November, after moving broadly sideways from late July to 28 October. Kijun-sen (the 26-dayMA) tended to be horizontal then, but after the 28th started moving higher at an angle just over 45 degrees -

We’ll look again at the chart we saw a little earlier. Note how quickly Chikou Span (dark green line) drops to the cloud in December, then clings within the cloud’s upper and lower boundaries. Chikou Span is used in combination with today’s candlestick: • if Chikou Span is trading above the candlestick of 26 days ago, then today’s market is said to be in a bullish long term phase; conversely, • if Chikou Span is trading below the candlestick of 26 days ago, then today’s market is in a long term bearish phase. Same idea for Chikou Span itself and the Clouds: above the Cloud of 26 days ago, then today is bullish - and vice versa. Support and resistance for Chikou Span Finally, the position of the candlesticks themselves, the moving averages, and the Clouds are also levels of support and resistance for Chikou Span. These will give suggestions where today’s support and resistance lie. The 9 and 26 day moving averages also act as support and resistance for Chikou Span. It

Remember, this is a system for markets that are trending. In sideways markets it is hopeless, as you can see in the first two thirds of the chart below of the S&P500. Moving broadly sideways from July to November so the clouds are of no use.

The distance between the Cloud and the current price is not significant. Again,Western methods often suggest that when prices are a long way from a trendline, or two averages, the market is unstable and possibly out of control. Not so with this method. In some ways it is a similar idea to that of the 26-day moving average which, when very steep, means a powerful trend in place.As a concept, it is the opposite of the Relative Strength Index, or reversion to the mean. However, when faced with soar-away price-action, I watch far more closely for reversal candlesticks. It does feel churlish to warn that ‘the end is nigh’ when others are rushing in to buy, and we all know not to count our chickens before they hatch. And powerful moves can be short-lived but take prices way beyond what anyone had hoped for. But it cannot last forever, so watch for signs of instability in the candlesticks themselves. This major market is up 25% in just one month – probably difficult to sustain. No

The thickness of the Cloud is important. The thicker the Cloud, the less likely it is that prices will manage a sustained break through it. The thinner the Cloud, and a break through has a much better chance. So, Cloud is Cloud regardless of whether Span A or Span B is on top; the thickness is what matters. Crossover points I have often been asked whether the crossover point of the Senkou Spans is important. No, other than the fact that at that point the Cloud is at its thinnest. Senkou Span B is often a horizontal, as important highs/lows remain in place for a long time. Trend reversals Thin sections in the Cloud give us an idea of when the market is likely to change trend. Look ahead and see when, and at what price, it gets very thin. Similarly, if the Cloud is getting fatter and fatter, the chance of a reversal in trend lessens looking out into the future. It gives dates (I’d say three or four days around the central day) when there is an increased chance of a succe

Clouds can be very useful in adjusting a basic trading position. Partial profits can be taken or tentative new positions can be entered into without waiting for the moving averages to cross.

Firstly, if today’s candle is above the Cloud, the trend is for higher prices. The top of the Cloud is the first level of support and the bottom is the second level of support. From experience, I have seen that these really do often work, but one has to give them a little leeway. Normally, I would also wait until the end of the day to see whether the closing price is below the Cloud, before even beginning to consider whether the trend has reversed. The opposite is the case when candles are below the Cloud, with this becoming the area of resistance. Very often the market seems to move through the first support/resistance level and fails somewhere in the middle of the Cloud. When this happens we watch the shape of the daily candlesticks to see if they give a reversal signal. Note the stepped Senkou Span B line, as slowly the high of the last 52 days drops out.