Understanding Ichimoku: implications for USD/JPY
Nov 13 (Reuters) -Ichimoku Kinko Hyo, which means "at a glance balance charts", is a complex charting technique developed in Japan in the late 1960s to forecast equity markets. Once an obscure method of analysing financial markets confined to Asia, it is now extensively used by technical analysts globally to predict the direction of prices in a wide range of assets.
We will explore the main features of an Ichimoku chart and explain what it could mean for USD/JPY:
TENKAN-SEN and KIJUN-SEN
The tenkan-sen, or conversion line, is the midpoint of the last nine trading sessions, while the kijun-sen, or base line, is the midpoint of the last twenty-six periods.
Each line on its own can offer support if below the market and resistance when above. A tenkan-sen crossover above kijun-sen is seen as bullish. If the opposite occurs, that would be a bearish sign.
CHIKOU-SPAN
The chikou-span, or lagging line, is the current price plotted twenty-six periods back. This is essentially a measure of momentum. If the current price is higher than it was twenty-six sessions ago, momentum is seen as positive. Conversely, if the market price is below it, momentum would be negative.
THE CLOUD
The cloud, or kumo, is a region between two lines called senkou (leading) span A and senkou (leading) span B. Senkou span A is the midpoint of tenkan-sen and kijun-sen, plotted twenty-six periods ahead. Senkou span B is the midpoint of the last fifty-two periods also plotted twenty-six periods ahead.
When the market is trading above the cloud, this region is seen as support. However, when an asset price is below, the cloud can be viewed as a region of resistance.
CLOUD TWIST
The "cloud twist" is when the cloud extremes, senkou spans A and B, cross and that can warn of an imminent reversal in a market. Often the location and date of the "twist" can combine to act like a magnet.
WAVES, TIME AND TARGETS
More advanced elements of Ichimoku charting include waves, with patterns such as "I", "V" and "N". In addition, time can be used to measure when a wave could be coming to an end. Lastly the type of wave can be used to establish a potential target.
SO WHAT COULD ICHIMOKU MEAN FOR USD/JPY?
There are a number of bullish signs on the current USD/JPY Ichimoku daily chart. The tenkan-sen and kijun-sen are positively aligned, with spot trading above both these lines and the cloud too. As chikou-span is well above the price of twenty-six days ago, that shows momentum is currently positive.
There is potential for the completion of a "V" wave, which would be an 100% retrace of the 161.96 to 139.58 (July to September) drop. As the drop from 161.96 to 139.58 took 53 days, the rise to the 161.96 "V" wave target could also be reached in approximately 53 days (November 28)
FX traders should be mindful that there will be a "cloud twist" on Friday below 146.00, that warns of a potential relapse in the near-term. If the uptrend is not disrupted by significant losses this week, that will add to the underlying bullish outlook.
For more click on FXBUZ
Tenkan and Kijun: https://tmsnrt.rs/3AvkwEa
Chikou: https://tmsnrt.rs/40LBiJM
Cloud: https://tmsnrt.rs/48LPN2i
"Cloud Twist": https://tmsnrt.rs/4esYNdC
"V" Wave: https://tmsnrt.rs/48O0am8
Daily Chart: https://tmsnrt.rs/3O7lD00
(Martin Miller is a Reuters market analyst. The views expressed are his own)
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