Many stock market indicators look complex, but understanding how to use them is relatively easy. The Ichimoku Cloud is one of the more intimidating indictors. According to stockcharts.com:
The Ichimoku Cloud is a versatile indicator that defines support and resistance, identifies trend direction, gauges momentum and provides trading signals. Ichimoku Kinko Hyo translates into "one look equilibrium chart". With one look, chartists can identify the trend and look for potential signals within that trend. The indicator was developed by Goichi Hosada, a journalist, and published in his 1969 book. Even though the Ichimoku Cloud may seem complicated when viewed on the price chart, it is really a straight forward indicator that is very usable.
There are two basic schools of thought in terms of how to use technical analysis of stock charts.
- Approach One: Charts and indicators are used to forecast future trends, timeframes, and price targets.
- Approach Two: : Charts and indicators are like the gauges in your car; they tell you what is happening now and help you monitor changing conditions, such as engine temperature or speed.
We wholeheartedly subscribe to the second approach, which does not involve forecasting. From our vantage point, the Ichimoku Cloud is not a forecasting tool; it is more like a temperature gauge.
What is the Ichimoku Cloud telling us now about the stock market? It is telling us to be careful and be ready to raise even more cash.
In the daily chart of the S&P 500 below, the value of the index, or price, is shown in black. The cloud is formed by the thin red and green lines. The cloud can be green (bullish) or red (bearish). The trend is down when prices are below the cloud. Price just recently broke below the cloud (point A), which means the short-term trend is down. Notice price remained above the cloud from October 2010 until June 3, 2011. The break below the cloud tells us something is changing relative to the desire to own stocks. Once price (black) breaks below the cloud, the cloud may act as resistance on the next rally attempt (see point B). Cloud resistance may come into play near 1,310 on the S&P 500.
Point C in the chart above also highlights a potentially bearish development in the short-to-intermediate-term. When the cloud turns from green to red, as is recently did, it reinforces the downtrend signal we received when price (black) moved below the cloud. Point D also gives two more reasons to err on the defensive side: (1) price (black) is below the red line, and (2) the blue line is below the red line, both are negative signals.
Every signal the cloud can provide is leaning bearish at the present time. The easiest way to overcome the current bearish set-up is for price to break back above the cloud, which would require the S&P 500 to claw its way back to somewhere in the neighborhood of 1,324 to 1,340. The current market requires a defensive slant, but an open-mind and willingness to redeploy cash quickly, since from a big picture perspective we still remain in a bull market, albeit a fragile one.
Source: Ciovacco Capital
