First, thanks to the wonders of having a day-job, I am not
always able to monitor positions (or SoH for that matter); so trading intraday
is generally too risky for me. I have
therefore focused my technical efforts toward short/intermediate positions with
pre-defined limit orders to execute.
Secondly, I am a firm believer in the mostly-obvious fact
that no one technical analysis is the “never-fail holy grail” system; each has
their strengths and weaknesses. When
taken together, a Bollinger bound candle chart with volume, MACD and
stochastics can be quite valuable.
A few years ago, I came across one type of chart that meets
both of my requirements: the Ichimoku Cloud chart (a.k.a. Ichimoku Kinko Hyo). Based on my initial reading, this chart was
developed by a Japanese journalist to track rice trading (don’t quote me on
this, I read the article a few years and many bottles of vodka ago), showing
equilibrium, support and resistance. In
the last few years, the Ichimoku Cloud chart has gained some popularity with
Forex, commodity and equity traders.
I will skip
the official “how-to” read an Ichimoku Cloud chart – you can find that
online. I am not affiliated with any of
the following, but they appear to be decent Ichimoku references:
http://www.investopedia.com/articles/forex/06/ichimoku.asp
http://www.fxwords.com/u/ichimoku-cloud.html
http://www.ichimokutrader.com/ – this site popped-up last summer (so the
data is limited), but it looks like a good app that highlights the key signals
The following is an Ichimoku Cloud chart (with volume) of
the NYSE going back 3 years:
In the possible event that chart initiated a seizure, please
accept my apologies – I did not want to reproduce any copyrighted material, so
I built my own. With that said, the kumo
(cloud) is the area between the green and gray areas (i.e. the blue or yellow
areas). We are in a bullish trend when
the close is above the cloud (in the gray) and bearish below the cloud (in the green). My personal observations correlate with the
official signals: essentially, I have found the cloud to be similar in some
ways to Moving Average signals (golden/black cross, etc.).
Here is a zoom of 2010 through May 15th:
As you can see, with last week’s dump and this week’s ramp,
we were back “in the cloud” until Friday’s drop, which as of the close, cracked
below the support at the bottom of the cloud (7124) to close at 7077. It doesn't guarantee we plummet from here or
anything, but I think it is a good datapoint to support Tim’s recent post. Looking at the first chart, you can see the
market oscillated through the cloud during 07 & 08, until that summer- when
it authoritatively broke (see Aug-Sept 08 failure at resistance) and all hell busted
loose.
These charts have helped keep me from suffering recency
effects. In the summer of 09, I did not
respect the resistance the cloud indicated and was very short (damn you SRS). It was tough telling the kids they needed to
start working in a coalmine after kindergarten.
About then I also came across a quote I’ve posted a couple of times:
“You don't try. That's very important: not to try, either for
Cadillacs, creation or immortality. You
wait, and if nothing happens, you wait some more. It's like a bug high on the wall. You wait for it to come to you. When it gets close enough you reach out, slap
out and kill it.”
–
Charles Bukowski
I hate making the same mistake twice and am now using these
charts as an additional “big picture” of the market environment. So while I might trade a little from time to
time using other technical analysis indicators, the bulk of my resources are
waiting for the cloud to break: the bug is coming closer (much closer as of Friday), but it isn’t here
yet.
Thanks to Tim for giving me an opportunity to post.
