Alright, the year 2018 has come to an end and I thought it would be a good time to look at how market has fared overall from the long-term, medium-term and short-term perspective. Since we have covered both part 1 and part 2 of the Ichimoku Cloud series, let’s apply what we have learnt and put them into practice. Knowing what is Ichimoku and how to interpret the common strategies of cloud charting is only the beginning. Theory and knowledge is not power, its only potential. It is only the application of knowledge into practical trades and understanding do we fully understand what it really means.
In this post, I will be analysing the S&P 500, Shanghai Composite and STI using Ichimoku Cloud. Since DJIA and Nasdaq are highly correlated with SPX, I figured that doing S&P 500 alone is representative of the US market. Note these are just some of the basic cloud strategies or ways to use Ichimoku cloud. I would be writing part 3 on advance Ichimoku strategies in a later post. Without further ado, let’s get started.
This is how i would normally go about analysing a market using technical analysis. I start off first with the monthly time-frame to get a macro overview, followed by weekly and daily.
US Market: S&P 500
Monthly Time Frame
I like to use Kijun-Sen crossover on the monthly-time frame as i find it to be a predictable and reliable indicator. Notice that price ONLY cuts below Kijun-Sen on 2 occurrences? Once in the Dot-Com bubble crisis in 2000 and another one during the Subprime Mortgage crisis in 2008. Ever since 2008, we have been on a long bull-run for almost 10 years and every time price reaches the Kijun-Sen line it bounces off upwards continuing the trend upwards.
From this we know that the Kijun-Sen is a very important line and strong support that is highly respected by the market. Fast forward to Dec 2018, we are now at the point where prices are being tested at Kijun-Sen support. Is that a retracement before the old bull continues up? OR is it an imminent recession similar to what we’ve seen in 2000 and 2008? We have to zoom in at the weekly or daily time frame to get a closer look on price direction and momentum for us to answer that question.
Since this chart is plotted on a monthly time-frame, we have to wait till 2019 march or April for us to get a solid confirmation that prices have bounced off or crossed below Kijun-Sen. Let’s zoom in on the weekly scale to see what’s going on.
Weekly Time Frame
Alright, what is the most obvious thing you see here? Yes. Prices break BELOW kumo cloud and its last line of defence (Senkou Span B). Chikou Span break BELOW cloud projections that are made 52 weeks ago. And remember if prices stay below Kumo cloud, its a bearish signal?
Next, we have a bearish TK crossover where the Tenkan-Sen crosses below the Kijun-Sen. The crossover happened above Kumo Cloud (in a bullish region), hence the negative sentiment is lessened. Nevertheless, its still a bearish signal as short-term price (mid-point of past 9 weeks) is now LOWER than that of the medium-term price (mid-point of past 26 weeks).
Let’s see our cloud projections. Noticed a Kumo twist? That’s when Senkou Span A crosses below Senkou Span B and cloud turns from green to red. Do note that when a cloud changes colour from green to red or vice versa, it doesn’t immediately mean its a trend reversal. Sometimes, it could be correction, market fluctuations, or a very short and small bear market. One way to get a confirmation that its a trend reversal is to observe the size and fatness of the red cloud. If its thin and small, then probably not a recession but if it gets big and fat, that means volatility is high and selling pressure is strong!
Using the Chikou Span, I have put in some simple support/resistance levels. Prices seem to have bounced off the support line at around 2350 after a heavy sell-down. But the recovery has to break ABOVE cloud for this current uptrend to continue. I foresee tough resistance around 2600 as that is the resistance line which is drawn using Chikou Span. The 2600 level also coincides with some flat kumos surrounding this region.
For the next few weeks, I will observe the candlestick behaviour as they approach towards the kumo clouds. If body of candle is getting smaller, it means weakening buying momentum and sellers are going to come in when it hits the resistance levels. If there are big long green candles and they managed to break through the clouds, it means its just a correction.
What else can we do with the Chikou Span? Compare price today to price 26 weeks ago. Since Chikou Span is BELOW the candlesticks, it means lower lows. The S&P 500 is NOT making higher highs as it did anymore. Notice how Chikou Span always remain ABOVE the candlesticks soaring high with no resistance for the past few weeks. But now, it has break BELOW Tenkan-Sen, Kijun-Sen, Senkou Span A and its now hanging on Senkou Span B support line.
There are a lot of bearish signals when we zoom into the weekly time frame. In my personal opinion, its still hard to tell at this moment whether the bear trend will continue downwards or its just a correction. We would have to wait for a couple of candle sticks and observe how price reacts to resistance levels before making any judgement call. Let’s see the daily time frame to have a micro-view of price action.
Daily Time Frame
Looks pretty bearish to me. Both prices and Chikou Span are BELOW cloud, Kijun-Sen and Tenkan-Sen. Kumo cloud projections have turned from green to red. But what I want to highlight is the 4 lines of defence. As mentioned in the previous posts, prices have to break through Tenkan-Sen > Kijun-Sen > Senkou Span A and Senkou Span B for market to get out of the bear market. Notice what happens to price when they approach the first line of defence (Tenkan-Sen). I have zoomed in to get a clearer view.
Look at the price action behaviour. Did you notice the length of the candle body gets shorter as it approaches resistance levels. There is decreasing buying momentum and when it hits Tenkan-Sen, selling ensues and price close lower for the day. Will it break past Tenkan-Sen? We have to wait a few more days to get an answer. But even then, there is still Kijun-Sen, the 2600 resistance level and Kumo clouds hovering above.
Closing Thoughts on US market
Since prices and Chikou Span are BELOW clouds on the daily time frame, we have officially entered a bearish territory and the tides have turned. But this is just the beginning of a bear market, we have to observe price action as it approaches key resistance levels and observe whether it is able to close ABOVE clouds. If yes, we probably still have another lap of bull-run. But if prices bounced off away from resistance levels, that’s a bad sign. It might be time to short the market.
China Market: Shanghai Composite Index
Monthly Time Frame
Prices are below cloud, prices are below Kijun-Sen. TK crossover happened below cloud in bearish territory and cloud looming ahead is red. The China market is bearish at the moment. But do you notice something? The clouds doesn’t look as nice as it did on S&P 500 where there is clear consecutive green clouds (uptrend).
This is the thing about technical analysis. You don’t always get nice perfect patterns all time time. If you don’t see it means there is’int any pattern. Not all markets work well with Ichimoku and we have to accept that. That’s the reason why Ichimoku is more applicable for trending market. China market is more volatile and unpredictable. As you can see from the charts, There are no CLEAR “long-term” uptrend or downtrend patterns. The only pattern i see is price movement mimics that as seen from 2008 to 2012. A sharp rise followed by a sharp dump then consolidation phase.
We are now around the consolidation phase and there are 2 support lines at 2400 and 1950. Chikou Span is also testing the Kumo cloud support. Interestingly, even if prices are below cloud, the Chikou Span is still ABOVE cloud and it has not breakdown yet. The cloud supporting Chikou is actually projections made 52 months or 4.3 years ago!
Not much can be gathered on the macro overview. Let’s see if we can get any additional insights from the weekly time-frame.
Weekly Time Frame
If we zoom in closer, we can see that China rallied for around 2 years since 2016. But its a weak bull run as the gradient of the trend is gentle, not steep. In Q1 of 2018, prices and Chikou Span broke BELOW cloud signifying the start of this bear market. This is a clear bear market unlike the S&P 500 where we are unsure if its a correction. Prices are below cloud, Kijun-Sen and trading closely around the Tenkan-Sen. Chikou Span is underneath everything.
If you have situation when prices are BELOW ALL 4 lines of defence, that’s a strong bear market. Similarly, if prices are soaring high ABOVE ALL 4 lines of defence, that’s a strong bull market. Why is this so? Simply because if prices are above Tenkan-Sen, Kijun-Sen, kumo cloud, there is NOTHING stopping against price and the runway is clear, no obstructions. But if prices are below Tenkan-Sen, Kijun-Sen, Kumo cloud, you have many resistance levels and everything is pressuring down against you.
Let’s take a look at the daily time frame.
Daily Time Frame
Clear downtrend as you can see, everything is beneath Kumo Cloud. But what is interesting here is that we see THINNING Kumo cloud. Tenkan-Sen, Kijun-Sen are very close to Kumo cloud near the end of 2018. What this means is that prices are trading very closely to the index’s long-term bias indicator. The short-term price, medium-term price all converges with the long-term price. This means price at at or near its equilibrium between buyers and sellers now.
That is why there is low volatility as seen by the thin kumo cloud. If periods of low volatility continue on for the next few days, there is likely to be a volatility squeeze upwards or downwards. Since, thin kumo clouds are easier to break through resistance, a Kumo breakout might be round the corner, if the high volatility break is in favour of the bulls.
Closing thoughts on China Market
China is clearly in a bear market. The question is how low would it go and how long would this bear market continue? There is strong support around the range of 2000 to 2400 where prices consolidates after a sharp dump in the 08 crisis. I am bullish on China in the long run. It is projected that China will eventually overtake US economy in terms of GDP by 2030. US GDP growth rate is around 2-3% while China is around 6-7%. China is now transitioning from the manufacturing-based economy towards a service-driven economy. But in my opinion, the main catalyst of growth would come from China’s FinTech innovations and advancement especially in the field of e-commerce, cloud computing, robotics, blockchain, e-payments etc. China’s BAT companies (Baidu, Alibaba, Tencent) are all working on this areas and these are massive internet giants growing at double digit growth rates!
There are still uncertainties and tensions surrounding the US-China trade war issues that are not resolved. But the sell-off seems to be slowing down as it approaches key support levels. The gradient of Tenkan-Sen and Kijun-Sen has become flatter instead of sloping downwards. This might signify consolidation and accumulation phase before reversal. The key indicator I would be watching out for is a Kumo breakout ABOVE clouds on the daily time-frame. If I have the capital, China would be a good time to accumulate right now.
Singapore Market: Straits Time Index
Monthly Time Frame
The first thing i noticed is Flat Kumos and double tops. Price attempts to break through the peak as seen in the above arrows, but failed twice forming a double top. It’s not a good sign that price can’t make higher highs than the peak as see in 2008. STI needs to break above 4,000 for this uptrend to continue in the long-run.
There are 2 flat Kumos acting as a strong support and you can see how prices bounces off from the cloud. The Flat Kumo support at 3050 is formed since 1 Jan 2016! This means that from 1 Jan 2016 until 30 Dec 2018 or the past 3 years, closing price of every month did not make a higher high or lower low than the mid-point price of the past 52 months.
From a macro overview, you can clearly see there are 2 directions prices can go from here. First is it attempts to break past the resistance level at 3500, for the THIRD time. And second is it goes lower to test support level at 2685. If it fails to break past the resistance, that’s a strong bearish sign to short as its a triple top pattern. If it breaks past the support level at 2685, that’s also a strong bearish sign as that’s the flat Kumo support. If neither of that happens, STI will continue to consolidate between this 2 channel lines of resistance and support.
TK crossover have not happened yet and Tenkan-Sen is still Above Kijun-Sen. That’s bullish but its starting to converge and we do not know if it would crossover in the next few months. Prices have cut BELOW Kijun-Sen and its now supported by the Kumo Cloud at 3050. Failure to hold support would result in a Kumo breakout which might signify the start of a bear market in the longer term. Chikou Span is NOT above cloud, its inside cloud which is not a good sign. We want Chikou Span to be ABOVE cloud to give us the confidence that its a strong bull. My overall guts is this is an uncertain bull. Let’s take a look at the weekly time frame and see what we’ve got.
Weekly Time Frame
Looking bearish! You would have been pretty familiar by now with what are the 4 orange circles by now after the previous posts and examples. If not, its a good time to recap the concepts. Kumo Breakout + Chikou Span Breakout BELOW clouds. Tenkan-Sen BELOW Kijun-Sen and a Kumo Twist. The interesting part to highlight here is you see how price attempts to break through the Kijun-Sen but got rejected? It fails to get pass the second guard (our Kijun-Sen). That resistance level also coincide with the Flat Kumos around mid 2016. Prices as of TODAY are now being supported by the Flat Kumo at 3050, failure to do so would bring price further down to the range of support levels between 2700 and 2900.
Daily Time Frame
Many insights from this chart can be gathered. Let’s see how many can you spot. This is a perfect example to illustrate how Kumo Cloud can act as a support level as well as a RESISTANCE level. Notice what happens when price approaches Kumo cloud. It gets bounced off downwards. Multiple times it attempts to break through the kumo clouds but failed to do so. Prices are now trading INSIDE cloud and its consolidating. It has NOT breakout of kumo cloud yet and we are still in bearish territory.
Chikou Span is at price which means price today and price 26 days ago is exactly the same. That provides us with additional confirmation that prices are now consolidating. Its a good sign as at least it tells us that prices are NOT making lower lows.
The third sign that tells us prices are consolidating is to look at the Kijun-Sen. It has flattened out from a down slope as seen in the past few days. Usually the pattern of reversal is when the Kijun-Sen slope downwards, flattens, then slope upwards. Likewise in an uptrend, the pattern of reversal is when Kijun-Sen slope upwards, flattens, then slope downwards. But can you see something else? What is the main challenge for prices in the cloud right now? If you have guessed it right, it means you have a good gasp of understanding the Ichimoku Cloud system by now. The main resistance is the FLAT KUMO TOP at around 3120.
Closing Thoughts on Singapore Market
From the long-term perspective, STI appears to be consolidating after recovering to the highs during 2008. It is unable to break past the peak resistance of the channel but is supported by strong flat Kumos at 2685. From the short-term perspective, STI has been on a downtrend since June 2018 when prices & Chikou Span break below kumo cloud. But what we are seeing in 2018 Q4 is that Chikou Span, Kijun-Sen and Tenkan-Sen are starting to transition from sloping downwards to sloping SIDEWAYS. Might be a reversal OR a bear taking a breather before continuing downwards. If the candlesticks and Chikou Span can’t break ABOVE kumo clouds, we are still in a bearish territory and prices will continue to slide downwards.
STI is already in a bear market on the daily and weekly time frame. Personally, I wouldn’t get into STI as witnessed by the double top on the monthly time frame. This uncertain bull is treading in dangerous territories where crocodiles are swarming around. It has strong resistance ahead and STI must muster the courage to charge through before I can be assured of a strong bull.