Using the Ichimoku Cloud to forecast the market direction.

Are you wondering where the market is heading? At this point in time it is worth deciding where you stand. Are you Bullish, Bearish or undecided?

A really excellent tool for helping visualize a what stage the market is in, is the Ichimoku Cloud.
Details of the Ichimoku Cloud Theory can be found on the web. The Society of Technical Analysts have good information on reading and understanding the Ichimoku Charts here.

However to keep things extremely simple.

  • When a price pattern enters and breaks through the cloud downwards from above this is a bearish sign.
  • When a price pattern enters the cloud from below and breaks out up through the cloud this is a bullish sign.
  • The Cloud can also indicate a good area of support of resistance.

Take a look at the chart.


Freestockcharts.com chart courtesy of Worden Brothers, Inc.

This is a weekly chart of the S&P 500 mapped against the Ichimoku Cloud (Standard Settings)

I mapped the Chart back to the year 2000 so we can visually compare the last recession ending in 2003, with the current recession. How does price compare with the Ichimoku clould on both of these occasions. The findings are extremely interesting!

  1. September 2000, the Price Bars broke through the Cloud resistance signaling a market in decline.
  2. The Market enters into a 3 year bear market, finding resistance 3 times in late 2002 and 2003.
  3. In August 2003 the S&P500 breaks out of the Ichimoku Cloud and moves vigorously into the New Bull Market.
  4. Moving forward to November 2007, the market enters the cloud from above and the ensuing Bear market takes hold.
  5. August 3rd 2009 the S&P enters the cloud from below. this is a potentially Bullish sign, but can really only really be confirmed when the index breaks out upwards through the cloud, and moves higher on stronger volume.
  6. On the volume pane (middle pane) we see that on both occasions the bottom of the market took place on reducing volume.
  7. We also see the MACD Histogram (weekly), has remained bullish since entering the cloud in 2009 as it did in 2003.

In Summary.

The Ichimoku cloud is an excellent way to visualize at what stage the market is in.

The market participants have not fully committed to a Bull Market yet, although the recovery since March 2009 has been impressive. An exit from the Ichimoku cloud upwards will be seen as a very positive sign. This perhaps explains why at this very time the market seems to be volatile. It is decision time and only the market will tell us the way.

Note : The Chart on this article is provided by Freestockcharts.com. This is in my opinion the finest free charting tool on the web. It has support for a huge number of indicators and trend lines. Check out this tool and the award winning Telechart 2007 on the Worden Brothers Inc. Website website.

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8 COMMENTS

  1. I found your blog when I was searching on bing, and it brought me right to what I was looking for. I’m going to add your rss feed to my Google Reader, I look forward to reading more of your thoughts

  2. Thanks for the post Barry, very informative post.
    However i have a few basic questions (very new to investing, actually still in learning phase, so please bare with my questions as they are very basic :)-
    1. I am assuming ‘Ichimoku Cloud’ is an indicator? just like RSI that we can add to charts.. ?
    2. It is recommended to be used for daily charts, correct?
    3. Same questions i had pertaining to your post on AD Line- i suppose it is an indicator that can be added from charting tools..?
    4. Is there any specif parameter for these two indicators (AD Line & Ichimoku Cloud) before importing them to the charts? or it is standard?
    Thanks again for your help.
    AC 🙂

  3. Hi again Arunav, let me answer your questions.
    1. Yes
    2. Yes daily is a good timeframe
    3. Yes
    4. As with all indicators start with the standard timeframes, but then you can tweak the parameters to see which works best for you based. On your trading timelines.

    Good luck with your learning, you are on the right path.

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