Ichimoku Cloud or Ichimoku Kinko Hyo is a popular technical indicator developed by journalist Goichi Hosoda in a book published in 1969. It is based partly on the concept of the Japanese candlestick charting to predict future price movements. The theory behind the Ichimoku Cloud strategy is to utilize modified multiple moving average calculations and plot them on a chart forming a “cloud” that attempts to forecast where the price may find support or resistance in the future. The strategy also utilizes time to give a clearer picture of current and future price movements.
Ichimoku Kinko Hyo translates to one look equilibrium chart or that in one look, you can uncover the dominant market trend and the support and resistance levels.
The indicator appears overwhelming and complicated at first because of the calculations and the display of five different lines, including Conversion Line (tankan-sen), Base Line (kijun-sen), Lagging Span (chikou span), Leading Span A (senkou span A), and Leading Span B (senkou span B). However, after a quick review shows it is a simple and easy indicator to understand and interpret, producing clear buy and sell signals.
The cloud or Kumo, comprising the Leading Span A and B, is the heart of the indicator. It identifies the prevailing trend and forecasts future support and resistance levels. The relationship between the price, the conversion line, and the baseline can confirm the short-term trading signals.
The three primary things to remember about Ichimoku Cloud:
(1) If the price is trading above the cloud, the price trend is bullish and will likely trend higher.
(2) If the price is below the cloud, the price trend is bearish and will likely trend lower.
(3) If the price is trading in the cloud, the price trend is flat and will likely trend sideways.
Several other things are worth mentioning. The distance between the price and the cloud and the thickness of the cloud conveys the strength of the support and resistance, trend, and momentum. When the cloud is skinny, it denotes weak support/resistance and warns of an imminent price breakout or reversal. A thick cloud typically signals strong support and resistance. If the clouds are mixed and contracting, as depicted by a messy chart, it warns of a trading range. Generally, avoid trading inside the Kumo cloud, as it signals a period of indecision.
The cloud acts as major or minor levels of support and resistance. In a rising trend with a thick cloud, look for the price to pull back into the cloud support to buy. In a downtrend with a thick cloud, look for a rally into the cloud resistance to short.
Like other technical interpretations, when price breaks below the cloud support, then retest the cloud area from below and struggle to clear the prior support zone, then this area becomes strong resistance. The above technical developments are currently developing in many market indexes.
Ichimoku Cloud is unlike other technical indicators, as it provides current support and resistance levels and future levels projected into the future. Remember, the entire cloud is shifted forward 26 days into the future. The cloud plotted 26 days ahead of the last price point provides a glimpse of future support or resistance. It is most helpful after a price breakdown or breaks out, as it can provide the resistance and support needed to reverse the trend.
The recent price breakdowns in major U.S. market indexes and the subsequent oversold rallies have created an ideal scenario where the Ichimoku Cloud can help identify the current and future resistances 26 days out, which interestingly coincides with the next March FOMC meeting.
The Ichimoku Cloud interpretations for popular market indexes are summarized as follows:
S&P 500 Index (SPX – 4,521.48)
Current resistance = 4,600-4,650 or Neutral trend as SPX currently tests key resistance
Future resistance = 4,482-4,521 or Neutral to bearish trend projected into the future
Dow Jones Industrial Average (INDU – 35,462.78)
Current resistance = 35,500-35,700 or Neutral trend
Future resistance = 34,897-35,051.5 or Neutral to bearish trend projected
NYSE Composite Index (NYA –16,853.71)
Current resistance =16,850-17,000 or Neutral trend
Future resistance = 16,546-16,629 or Neutral to bearish trend projected
Nasdaq Composite Index (COMPQ – 14,194.46)
Current resistance = 14,500-14,950 and 15,300-15,500 or Bearish trend
Future resistance = 14,172-14,498 or Bearish trend projected
Nasdaq 100 Index (NDX – 14,747.03)
Current resistance = 15,000-15,200 and 15,500-16,000 or Bearish trend
Future resistance = 14,829-15,166 or Bearish trend projected