Cloud and the trend
Cloud and the trend
The Cloud is the first originality of Ichimoku, the element that "jumps to the eye" immediately by looking at a chart with Ichimoku.
It gives us the important notion of a market equilibrium. When prices are outside, the market will be considered as being out of balance > this is the notion of trend that will allow the market to evolve and find a new equilibrium.
The Cloud is built from the evolution of current prices and is projected 26 periods in the future. The SSA (midpoint between Tenkan and Kijun) and the SSB (midpoint over the last 52 periods) delimit an area whose thickness will be given by the volatility of the current market, defined by the evolution of the SSA.
In a very simple way, we will say that a market is in a downtrend when prices are below a cloud and uptrend when they are above. And of course the trend will be neutral when prices are inside the cloud> they are in equilibrium.
Then the cloud plays a role of last support / resistance once the market has crossed the Tenkan and the Kijun. The breakout of these support / résistance and hence the crossing of the cloud signals a trend reversal, as prices change side.
The important point I want to emphasize is that the cloud only becomes important when the market is nearby. Which means that although it is the evolution of current prices that allows the construction of the cloud, it only appears in the future. It will only interest the analyst when prices have reached the level of this future.
As a result, the cloud representing the current price movement is not there to confirm / invalidate this move.
If you look at a graph, just look at the movement of the market to know its trend. The cloud is only the consequence of this movement.
If we look at the price action (1), the market is bullish> do we really need to look at the movement of the cloud (1 ') to know / confirm this price action?
Then prices lateralize> the cloud is horizontal.
Then prices resume their rise and the cloud also goes up.
Similarly, during the long downward trend (2) that follows, there is no need to look at the red bearish cloud (2 ') to know that the market is falling. And when prices correct (rise) after reaching a low point, the cloud is horizontal.
On the other hand, where the reading of this cloud becomes relevant is that it becomes a resistance to this corrective movement.
The analyst will only consider the cloud when prices are close to it.
The future cloud has no "predictive power" in the present.
Therefore to say that a market is bullish / bearish because the cloud goes up / down does not make sense. The cloud rises / falls because the market is bullish / bearish.
Do not confuse cause and consequence .....
You will also have noticed that I do not differentiate the direction of a cloud by changing its color. All my graphics have blue clouds. Simply because the cloud can be blue / red while it is horizontal without trending ( chart below). Assigning a bullish / bearish color doesn't improve the analysis but could give a false information.
The Supports / Trend Resistances indicated by the cloud are also clear with a single color.
In conclusion, read Ichimoku for what it is meant to say and not for what it doesn't with the risk of complicating its interpretation. You must understand the meaning of each element in order to extract the most relevant information in accordance with what we are looking for.
Remember that the Ichimoku was developed to complete the reading of the Japanese candlesticks i.e. prices .... so you must first look at the price evolution, Ichimoku only giving the levels that can hinder the price action > supports and resistances.
For more details on the construction and interpretation of the cloud, please refer to my book from pages 23 to 25.
©Karen Péloille - All rights of reproduction, translation and adaptation reserved for all countries.