Ichimoku Kinko Hyo (One Glance Balance Cloud Chart) was published in 1968 by Goichi Hosada under the Pseudomonas Ichimoku Sanjin. Originally for the Japanese stock markets studies it has been adapted for most. In Knovawave methodology it fits in nicely with its advanced warning of trends and reversals.It enables a quick one view fits all overview of the market.
The Ichimoku Cloud
In Knovawave we look for confluence with our other components with the following :
Kumo (cloud) differs from linear support and resistance in such as Fibonacci and pivots. The Kumo is much like our Knovawave 'spit' and Murrey Math +or- 1, 2 and 3 as a dynamically evolving object of support and resistance with kumo thickness telling. We look to see what the Kumo is when price breaks it. Kumo is always changing shape representing a truer perspective of support and resistance. In essence it is based upon price action evolving shape based upon previous price moves. You can say the Kumo allows both Static and Dynamic support and resistance levels. If we have been in a strong trend for sometime and price then breaks the Kumo, it usually represents a trend change and the likelihood of a large move about to begin in the direction of the break.
Tenkan Sen (line) is the conversion or turning line takes the highest high and lowest low over the last 9 periods. Like Gann and Elliott; Hosada felt price action and its extremes were more important than smoothing as price action represented buyers and sellers entering and therefore directing a market averaging or smoothing sterilizes this. Thus Tenkan Sen is more representative of price action.
The angle of the Tenkan Sen as the sharper the angle, the stronger the trend. The Tenkan Sen is a gauge of the momentum of a move. It is a effective as the first line of defense in a trend, breaking of it in the opposite direction of the trend may a sign of the defense s weakening and a sign of reversal.
Kijun Sen (line) is the datum line or trend line designed to indicate an overall trend, it takes the highest high and lowest low over the last 26 periods (Same formula Tenkan last 9 Kijun last 26 periods). The angle of the Kijun reflects the overall trend. Price breaking the Kijun after being may signal a reversal. When price breaks or closes above or below it by a meaningful amount the trend is often over. Flat says the midpoint of the price range of price for the last month.
The space or cloud of the Kumo is between two main lines referred to as Senkou Span A and Senkou Span B.
Senkou Span A is formed by taking the Tenkan Line and adding it to the Kijun Line then dividing that value by 2 and plotting it 26 periods into the future. (Tenkan Line + Kijun Line) / 2 placed 26 periods ahead).
Senkou Span B is formed by taking the highest high over the last 52 periods adding to it the lowest low over the last 52 periods. Then divide that by 2 and plotting 26 time periods in the futures. ( (Highest High + Lowest Low for the last 52 periods) / 2 and plotted 26 time periods ahead.)
The Chikou Span is a lagging line created by taking the current closing price for the instrument and shifted 26 time periods back. The allows perspective to how the current price action is in relationship to previous price action.This very useful for settlement periods and optionality. If the Chikou Span is lower than price 26 periods ago, then there is resistance for the current upmove or pressure which could force price down into a bearish move. If the Chikou Span is above price from 26 periods ago, then it would imply limited resistance ahead since price is in the process of making new highs or lows and there is no recent price above or below it.
Tenkan and Kijun Cross (TKx)
The TKx often indicates the formation of a trend by forming a cross (upward cross = possible upward trend while downward cross = possible down trend). However there is more to the signal than simple buy and sell. If the cross is below the Kumo then it was considered a ‘weak’ signal since the cross was below the Kumo or below resistance. A medium signal is when a cross happened inside the Kumo as it was occurring within the field of support/resistance. A strong signal is when the bullish cross happens above the Kumo as it was happening after clearing resistance.
The opposite is true for bearish signals whereby a weak signal is a cross above the Kumo, while a medium signal is inside the Kumo and a strong signal below the Kumo. This is where the Chikou plays its part, reference the Chikou Span to see how current price is in relationship to previous price action. The structure of the Kumo is also helps you determine a weak or strong cross. We use this in confluence with other KnovaWave components particularly Murrey Math.
Thin Kumo or flat top or bottom
If the Kumo is exceptionally thin in a ranging market it suggests a range will continue as their is not enough support or resistance to attach to a a single direction. Also when we are in a current trend and price is approaching a thin Kumo chances increase for a trend reversal since the support and resistance at the Kumo is insignificant.
When the Span B (last 52 periods absolute highest high and lowest low) becomes flat ) means price has not extended to make any new significant highs or lows defining a range. In such an example think of Span B as the virtual 50% Fibonacci retracement level for that range and the dynamic 50% fib level in a trending environment. If price is inside the Kumo it will have a tendency to gravitate towards the flat top or bottom. If price is above it, the tendency of price will be to gravitate towards the flat top or bottom.
Hosoda was familiar with the Elliott wave principle and applies a simpler version focused on pattern detection. Hosoda strongly believed the market was a direct reflection of human group dynamics or behavior. He has 3 typical patterns and a contraction and expansionary pattern reflecting human behaviour in terms of a constant cyclical movement both away from and back towards equilibrium in their lives and interactions. Each ichimoku component provides its own reflection of this shift to equilibrium or balance.