Market Technicians Association – United Kingdom Chapter

Monthly Meeting (February 2011)

TOPIC: "Ichimoku Charts "

SPEAKER: Tim McCullough,

Cross-Asset Technical Strategist Lloyds Corporate Markets

For more information:

> United Kingdom Chapter Chair: Alex Spiroglou (alex@TraderTD.com)
http://www.mta.org/eweb/dynamicpage.aspx?webcode=united-kingdom
Ichimoku
Practical Applications

PRESENTED BY

Tim McCullough
Technical Strategist

9th February 2011

Ichimoku Chart

EUR/JPY, monthly, 2000 - 2011

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Overview

5 Simple Trending Lines

• Simple, consistent construction

• Contrast current price with multiple layers of historical trend
• Demonstrate length, depth and strength of trend
• Most applicable in trending markets (with subtle uses within ranges)

Widely misunderstood and misinterpreted

• Minimal literature, esp outside Japan

• More subtle than many well-known western technical disciplines

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Common Misconceptions

• “ A Japanese discipline only for Japanese securities”

• “It’s only the current price versus the cloud which matters”

• “The forward part of the cloud represents a forecast of price ranges”

• “Ichimoku lines are constructed with moving averages”

• “Ichimoku should be used only with candlesticks”

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Conversion Line
Construction

• Midpoint of most recent 9 bars (including current bar)

• ie = (highest high + lowest low) / 2
• Appears similar to 9 bar simple moving average

EUR/JPY, monthly, 2000 - 2011

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Conversion Line
Application

• Compares current price & other Ichimoku lines with current 9 bar range
− If price below Conversion Line, then trend is bearish
− If price above Conversion Line, then trend is bullish

• Shortest, fastest trending line

• Break of Conversion Line = first confirmation of end of trend

− Changes from first support in prior uptrend to first resistance in new downtrend

• Slower confirmation of new trend if Conversion Line itself crosses Base Line
and then Cloud
− Faster trending line crossing slower trending lines

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Base Line
Construction

• Midpoint of most recent 26 bars (including current bar)

• ie = (highest high + lowest low) / 2
• Can appear similar to 26 bar simple moving average

EUR/JPY, monthly, 2000 - 2011

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Base Line
Application

• Compares current price & other Ichimoku lines with current 26 bar range
− If price below Base Line, then trend is bearish
− If price above Base Line, then trend is bullish

• Longer, slower trending line than Conversion Line

− Can appear as straight line, until 26 bar range broken

• Break of Base Line = second confirmation of end of trend

− Changes from second support in prior uptrend to second resistance in new
downtrend

• Slower confirmation of new trend if Base Line itself crosses Cloud

− Faster trending line crossing slower trending lines

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Base Line
Application

• Price breaks Conversion Line support and then tests Base Line support
• Conversion Line then forms new resistance
• Both lines offer tight trading parameters for trend resumption or major reversal

Gold Apr 2011 Future, weekly, 2010 - 2011

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Leading Span 1
Construction

• Midpoint between Conversion Line & Base Line, projected 26 bars forward
• ie = (Conversion Line + Base Line) / 2
• Forms top of Cloud in rising trend, base of Cloud in declining trend

EUR/JPY, monthly, 2000 - 2011

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Leading Span 1
Application

• Faster of the two lines forming the Cloud

− Based on 9 and 26 bar current ranges
− Moves faster when both Conversion & Base Lines already moving in same direction

• If comparing current Price with Leading Span 1 immediately above or below

− Compares current Price with mid-point of mid-points of historical 9 and 26 bar ranges
as of 26 bars ago, not with mid-point of mid points of current 9 & 26 bar ranges
− So compares Price with more historical aspect of trend

• Effectively compares current Price with extreme price up to 50 bars ago

(25 + 25 bars)

• Second slowest Ichimoku trending line

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Leading Span 2
Construction

• Midpoint of most recent 52 bars, projected 26 bars forward

• ie = (highest high + lowest low) / 2
• Forms base of Cloud in rising trend, top of Cloud in declining trend

EUR/JPY, monthly, 2000 - 2011

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Leading Span 2
Application

• Slower of the two lines forming the Cloud

− Based on 52 bar current range

• If comparing current Price with Leading Span 2 immediately above or below

− Compares current Price with mid-point of historical 52 bar range as of 26 bars ago,
not with mid-point of current 52 bar range
− So compares Price with more historical aspect of trend

• Effectively compares current Price with extreme price up to 76 bars ago

(51 + 25 bars)

• Slowest Ichimoku trending line

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Cloud
Construction

• Shaded area between Leading Span 1 & Leading Span 2

• Optional colour changes when Leading Spans cross over

EUR/JPY, monthly, 2000 - 2011

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Cloud
Application

• Shading largely cosmetic, potentially confusing and distracting

• Can be confused by some as forecast of future price range

• Cloud crossover lagging confirmation of previous trend reversal

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Lagging Span
Construction

• Current Price plotted 26 bars in arrears

• Appears as line chart (ie closing or latest price)
• Only Ichimoku Line which reflects pure price, not range
• Easy to overlook

EUR/JPY, monthly, 2000 - 2011

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Lagging Span
Application

• Lagging Span is current Price

− Often mistaken for historical Price, due to position on chart

• Compares current Price with same 4 Ichimoku lines 26 bars earlier

• Offers effective duplication of other 4 Ichimoku lines with older parts of trend
− eg comparison with Leading Span 2 immediately above or below Lagging Span
offers analysis of current Price with extreme of range up to 101 bars ago (76 + 25)

• In significant trend reversals, Lagging Span can provide price targets where long-term
trend resumes

• Often overlooked, due to human eye being drawn to right-hand side of chart, esp
forward-plotted Cloud

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Current Application
With DeMark Indicators™

• Correction in trend reaches Ichimoku trend resistance on long-term chart

• Use trend exhaustion pattern on short-term chart to re-enter long-term trend
with relatively low risk

US 10 year Generic Yield, annual, 1966 – 2011 US 10 year Generic Yield, daily, Oct 2010 – Feb 2011
Testing long-term Conversion Line resistance Approaching TD Combo 13 sell (latest bar 11)
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