As well as elliott wave analysis I also like to look at other techniques and have always found ichimoku charts interesting. They can seem a bit mysterious at first, but I find them quite valuable in determining potential changes in trend on all time frames.
I don't want to give a detailed explanation of the method here; there are many useful resources on the internet that do this. Here is a link to just one.
The cloud is what determines the trend, but at major turning points, it takes time for price to move above or below it and price can have moved substantially before it changes trend on this basis. However, the other components of the chart can be used for early signals and for warning when a potential signal may fail.
My main focus is the lagging line. If its above the price and the cloud, that's bullish. If it moves below price even whilst price is still above the cloud, that can be a warning that the uptrend is in jeopardy. Obviously, its the reverse when the lagging line is below price and the cloud or moves above price whilst price is still below the cloud.
Essentially, my interpretation is this:
1) Everything above the cloud:
a - if the lagging line is above price, price falling below the turning and standard lines and the turning line crossing below the standard line are usually false trend change signals;
b - if the lagging line falls below price and/or the cloud- that's a warning of a possible trend change;
c - if the turning line then falls below the standard line and price and/or price falls below both, the likelihood is that price will also fall below the cloud, confirming the trend change. The lagging line must still be below the cloud and price.
2) Everything below the cloud:
a - if the lagging line is below price, price rising above the turning and standard lines and the turning line crossing above the standard line are usually false trend change signals;
b - if the lagging line rises above price and/or the cloud- that's a warning of a possible trend change;
c - if the turning line then rises above the standard line and price and/or price rises above both, the likelihood is that price will also get above the cloud, confirming the trend change. The lagging line must still be above the cloud and price.
I'll illustrate in more detail how I use these charts with a weekly chart from May 1994 to December 2003 (it may not be how everyone uses them):
SPX Weekly ichimoku May 1994 to Dec 2003
You can see the application of the points I have set out above noted on the chart.
Here are those points illustrated on a weekly chart from Jan 2003 to date, in particular showing how the lagging line was warning of a possible trend change before the October 2007 declines started, as early as May 2007. It was then warning of a potential trend change after the 2007/2008 declines as early as Jan 2009.
SPX Weekly ichimoku Jan 2003 to date:
Note the possible trend change warning on the right hand side of the chart. The lagging line needs to stay below price. If it moves back above price, then there is no signal. At the moment, its trying to move back above price. That's what it tried to do in May/June 2007, but it failed and subsequently fell down through the cloud with avengence. That's what we need to see happen again if the trend is going to change to down on the weekly time frame.
Looking at the daily chart, a down trend has been confirmed on my interpretation - the warning signs were there in March 2010. You can see from the chart how very different this recent decline has been on this basis compared to the June/July 2009 and the February 2010 declines. This may suggest that its not just a pullback in an overall rally, but something more serious. However, I think we'd need to keep an eye on the weekly chart to see if the lagging line can stay below price on that time frame.
SPX Daily Ichimoku:
So far, although the the rally since May/June 2010 has caused the lagging line to move back towards the cloud and has caused price to move above the turning and standard lines, the lagging line remains below price and the turning line, as yet, shows no sign of moving above the standard line. So, the down trend shown on this chart remains intact, despite the recent rally.
Now here's the 60 min chart:
We're in an uptrend on this chart and as yet, there's no sign of a turn. Obviously, the picture here can change more rapidly than in the daily or weekly time frames, so its probably one to keep a closer eye on for an indication that the current rally may have run its course.
Once the 60 min shows a trend change, I'll then need to refer to the daily time frame to see whether or not the daily down trend has remained intact. Then on to the weekly, to check on whether or not that lagging line has managed to stay below price.
So, there it is, my brief explanation of how I use ichimoku charts. On their own, they are useful in anticipating potential trend changes. Coupled with elliott wave analysis, they can help to determine when a wave count may be nearing its end.
