Ichimoku Kinko Hyo: GBP/JPY – 01/18/2009

Ichimoku Kinko Hyo captures valuable information on just about any timeframe, but granularity builds below the 1H chart (and certainly below 15M) to a degree rendering the overlay mostly useless.  IKH’s versatility may indeed lend itself to scalping applications – certainly the history of the overlay itself demonstrates an outside-the-box approach can beget useful innovation – but whatever the case, for as a trader carrying on an outside daytrading/swing-trading rhythm, beginning with the 1D, then drilling down to 4H/3H and 1H for execution is very effective .

GBP/JPY has come to a significant medium-term way point.  Just about any method available to technically evaluate the pair bears this out with some clarity, IKH among them.

The Guppy topped out in early August at 215.89.  In the upper left corner of the chart, price can be found ranging around Kijun-Sen (the squiggly red line) just above the Cloud (kumo).  August 1o-12 emerge as tentatively crucial days: price closes below Kijun on 08/10 (Kijun cross), confirms a close below the Cloud on 08/12 (turning price orientation bearish) and Tenkan-Sen (squiggly blue line) is found to cross beneath and then begin diverging from Kijun.  Each of these points communicate a high probability that a (at least near-term) top has been put in.  Once Tenkan and Kijun are pulled beneath the Cloud following their bearish cross, the downturn they connote is well underway.

IKH: GBP/JPY 1D

Price moves into a Kijun cross-up (a bullish signal on for the Kijun Cross method) only once during the remainder of 2008, but is pushed back after a failed attempt to close the gap at 08/28-08/31.  No other IKH components signal bullish, keeping the IKH position trader in their short.

Then, after the first throwback from 130 during the illiquid Santa Claus rally sessions of 12/29 forward, the flattening grade GBP/JPY moved through since the beginning of November became highly evident as price crawled to within 700 pips of Senkou Span-A (SS-A, the green line bounding the bottom of the Cloud ).  

Today price is again doing something it did not between August-December: challenging Kijun with cross-up pressure.  Tenkan and Kijun are flat as the pair’s range continues to tighten (relative to the period of August-November).  The Chikou Span (light blue line) demonstrates price is in a nervous general state of equilibrium over the past several trading weeks.  

Collapsing our frame of reference considerably, the 1H chart zooms in on GBP/JPY’s latest pivot off the ~129-130 bottom put in last week.  The rectangle range characterizing 01/13 to the end of London 01/15 was broken in afternoon NY trading as price moved into and broke above Senkou Span-B (SS-B, the yellow line, always above SS-A during established donwtrends, bounding the top of the kumo).

IKH: GBP/JPY 1D

JPY continues to give way before GBP through the Tokyo until reaching ~135.50, a significant short-term line in the sand where price wound through a rectangle on its way down on 01/11-01/12, and further back the site of a pullback bottom, morning doji star/bullish engulfing pattern on 01/06.  Tenkan-Sen crossed above Kijun just as the lines broke above the cloud, confirming the bullish advance price began several hours previous.    

Price then pulled back to 132.50, 50% fib retracement for the move from 129 to 135.75 before moving to retest this evening.  This dip brought the 9-period Tenkan tumbling toward the 26-period Kijun which was still averaging the almost wholly uninterrupted 20-hour move to 135.75.  With the retest, Tenkan again emerges on top.  

The question then becomes: is today’s test of 135.75 a double top in the making, keeping the 1D picture unchanged, or is the higher low and identical highs under an IKH-bullish about-face late last week on 1H indicative of a continuation in the correction from 129 that will breakout above 135.75?  IKH points toward the latter scenario. 

Both charts demonstrate how cross strategies such as the Kijun price-cross and the Tenkan-Kijun cross can work well on their own and with compounded benefit if viewed together, explaining their status as basic staple strategies among IKH practitioners and building blocks within more sophisticated methods.

IKH: GBP/JPY – 12/16/2008

I’ve already forsook the modest goal I set of two or three IKH analyses a week.  Doesn’t seem outrageously ambitious; but these past few weeks once the house begins to settle after 9 p.m. I’ve got very little left over.  In fact, I began one of these last night, but was cajoled into watching the 1970’s-era Wuthering Heights (a novel which I’ll secretly admit to liking) and nodded off almost immediately (really must quit making a habit of that).   But, before I start bemoaning my sorry lot in earnest:

GBP/JPY - Ascending Triangle?

The IKH picture here is somewhat changed from a week ago. 

• The cloud-flip (Senkou Span-A and Senkou Span-B reverse position) on 12/14-12/15 mentioned on 12/10 as a neutralizing component on an otherwise bearish chart brought an upside breakout with the cloud’s lack of density.
• The series of candles following the overnight bottom on 12/12 lifted the (blue) Tenkan above the slower-moving (red) Kijun as 12/14 turned over into 12/15, giving portent to significant rally through 12/15.  
• Tenkan emergence above the cloud following a cross beneath it upgrades a weak bullish signal into a moderate signal, but movement of Kijun above the cloud.  By early morning ET on 12/17, the final two red candles of 12/11’s decline will fall off (recall Kijun’s original setting is 26 periods), which ought to significantly raise the line, perhaps out of the cloud altogether.
• As we noted, last week’s cloud was very thick; by way of comparison, now notice the change in density and series of flips for this week.  This denotes neutrality again, and suggests ~137 is a near-term fulcrum point but is neither firm resistance or support.  Price last week and this has borne that out.   
• The Chikou Span hovers around the 78.6% retracement from 140.79-132.61, pointing out the latest failed salvos against the ~139 resistance zone.   Notice the clarity with which the Chikou conveys price action around fibonacci levels.

Then there are the white lines drawn in. There is an ascending triangle, but lower marks for uniformity give legitimate misgivings about the upward breakout capability of the pattern. Be that as it may, ~139 has continued to serve as a pivotal area, which the horizontal white line indicates:

Fundamentally, I feel like arguing against an upside breakout because I just can’t shake the overshadowing pessimism merited by all of this month’s data, not least of which the FOMC announcement earlier today. Apparently, the equity markets disagree (“It’s finally priced in”, blah blah etc.), but does GBP/JPY?

With the pair coiling tighter, I tend toward a further retracement to 100% again (140.79), where the next true resistance level arises. Medium-term sentiment remains bearish-neutral until something arises technically to prompt otherwise.

0700 12/17/08: There was a breakout, to the downside, with a decline of roughly 250 pips overnight. Looks like the upside-averse intuition about fundamental weakness slackening risk appetite was a sound one.

Now price has returned to and is testing Senkou Span-A at the bottom of the kumo. If a break occurs there, a push down to 134-134.25 would follow; maybe back to a retest of the recent lows.  There is a confluence of support between the 23.6% retracement (for 140.79-132.61) and SS-A in the 135.50-135.75 region.  A close held below the cloud would lock a further move to 134, perhaps back to the 132s.

Within Cloud, testing Senkou Span-A

GBP/JPY: Conflicted

Here’s a brief followup on yesterday’s abbreviated IKH post:

As discussed briefly yesterday, the cloud usually exercises a momentum-mitigating effect. This is because in IKH theory the area between SS-A and SS-B comprising the cloud represents price equilibrium, disorienting weak trending or capping counter-trending moves. When price lies above the cloud, this is a field of support; when below, a field of resistance.

Here, price did squeak out a counter-trending rally to 138.37 mid-day, but in keeping with the neutral-bearish bias gave back those gains through the NY close. Mid-day Tokyo retested 12/10’s high, but could not attain a close above 138. Now price has sold off again, retesting the week’s low at 135.90 where a morning star was put in on 12/09.

Chikou Span suggested resistance (printed on 12/03, not pictured) with a top around 138.40. Price current sits below price at the Chikou around 12/08’s high at 139.60.

Tinkan and Kijun still maintain their sideways march with no substantive divergence, suggesting neutral sentiment remains in play.

Here’s the GBP/JPY 1D chart referred to yesterday:

As you can see, price remains firmly in a mode of decline in IKH terms.

Looking elsewhere: is that a falling wedge, giving portent of a bullish reversal? There is horizontal support in the 135.50 area, but pattern clarity for a descending triangle is weak. There was previously support around 139 for a descending triangle with much better clarity, but price has wandered aimlessly just below that line.

Back on the 3H, the long lower shadows the pair continues to turn out suggest possible maintenance of a bottom on the retest here. Bolstering this idea is support the .618 retracement line (for 133.29 on 12/05 – 140.79 on 12/08) is offering at 136.10.

Price is moving out of the cloud below it, and while that is bearish, the kumo does pull back to ~138.84, where the .382 retracement for 133.29-140.79 sits 5 pips away.

Trades: yesterday’s long from 137.17 missed its target by a few pips, closed out manually last evening for a negligible gain. I may sit today out because of conflicting input – we’ll see.

IKH: GBP/JPY – 12/10/2008

Kind of a harrowing day yesterday with end-of-year several weeks away, so last evening had to settle for this morning. As I mentioned, I intend to do analysis of at least one pair (usually one pair, unless I ascend to a state of analytical ecstasy into which my wife’s voice cannot penetrate) 2-3 times/week with more specific focus on Ichimoku Kinko Hyo than I’ve given in the past.

We’ll work off of a single chart today: GBP/JPY 3H (though I look at several TFs). 4H values vary, but a 3H periodicity gives a fair approximation.

For context: GBP/JPY broke below the cloud on the 1D chart on 08/11/2008 at 206.83. The pair has remained in freefall excepting 4 periods of significant retracement (09/15-09/23, 10/09-10/13, 10/27-10/28, 11/20-11/27) that are each correlated to a general, if temporary thaw in risk aversion. By way of example Kijun-Sen has not been tested by price since 10/13, currently printing about 1100 pips higher. The cloud lay significantly further up the chart.

Collapsing scope to a duration of one week on the 3H, IKH yields a neutral-bearish analysis, breaking down as follows:

The Cloud

Before anything else, how is price interacting with the cloud itself? The position of price relative to the cloud (above, within, below) is important, but also how the cloud itself is directing current price action. This may seem too obvious, but the contours of the cloud are a projection rather than coincident with price. On this chart the cloud has rejected the 12/08 advance at 140.79 as well as yesterday’s mid-day attempt at 137.20 corresponding with a sell-off in equities.

Overnight price did breach resistance, entering an unusually thick cloud some 400 pips in depth. Except in a fast, typically event-driven market where a significant change in net flows blows through any barriers in a pair’s path, the cloud has a stupefying effect on contrarian momentum; in this case, long GBP/JPY.

Senkou Span-A (SSA) remains as the lower bound of the cloud, denoting the ongoing bearish directional bias. But note, SSA and Senkou Span-B (SSB) reverse positions this coming Sunday 12/14 just as Tokyo opens the week. Is this especially significant? Not as a signifier of change in trend, but it does bolster the neutrality picture.

Chikou Span

The Chikou Span is probably the most neglected aspect of IKH, if for no other reason than because it doesn’t have any immediate connection with the other lines that comprise the overlay, and because it is casts information backward in time. Nevertheless it serves a couple important functions, working as an efficient and accurate map of local support and resistance and an indicator of price’s current position relative to 26 periods previous.

Price is currently higher than the Chikou, signaling bullish, and is testing resistance around 137.50 with 138.00-138.50 (12/01-12/03) the next area of contention. As always, though, it’s wise to take each component of IKH in tandem with the others.

Tenkan/Kijun

There’s a lot to elaborate on here: Tenkan and Kijun are the most common and most easily systematized aspects of IKH because of their simplicity and compact delivery of data.

As usual, rather than taking the signals I evaluate what signals different methods generate as indicators in themselves. For example, the Kijun cross (where price crossing over Kijun – the red line – signals long/short) suggests equilibrium, or a neutral view: nothing tradeable there. Then, there’s the widely-used Tenkan-Kijun cross (Tenkan – the blue line – yields a long/short signal with its shorter periodicity when crossing above/below Kijun-sen). Tenkan has signals short, but it’s oscillation around a flatlined Kijun also signals neutral.

There’s much more to get to in the way of combining this with other points of analysis, but I’ll have to follow-up later this evening. And I’ll have to develop a more succinct approach, and post a clearer chart.

Trades: flat, but contemplating long (for other reasons) from 137.30-137.50.

A Deeper Look at Ichimoku

I’ve incorporated Ichimoku Kinko Hyo (IKH) as an ongoing feature of my analysis regime for about 6 months; and while often including the overlay on charts posted, my conception of what IKH is communicating is something I don’t usually mention.

Given the remarkable insight IKH offers, along with its relative obscurity and daunting appearance, I think it’s time to change things up.

My plan (maintaining some degree of pragmatism) is to post a thoroughgoing IKH analysis every couple of days or so: probably for GBP/JPY, EUR/USD and a handful of others. I’ll be dipping into other pairs and maybe even other markets, but only insofar as intermarket analysis improves comprehension of some correlated pair(s) – e.g. equities vis-a-vis carry pairs.

I don’t employ many tools to analyze, execute on and manage through, but there’s certainly more to how I go about things than IKH. While I think Ichimoku can stand alone, I also use S&R, fibonacci studies, candlestick and chart patterns, looking for unanimity and confluence to disregard (what I think are) less probable trades. And sometimes, it actually works out.

Along the way, then, I’ll be bringing all of this together, while giving IKH more explicit treatment.

IKH Resources

For a primer on IKH, the best singular resource I’ve found online is the Ichiwiki.

As TLT pointed out some months ago, Nicole Elliott’s Ichimoku Charts is the best treatment of IKH currently published in English in bound book form. While Elliott has made invaluable contribution on behalf of students of IKH in the English-speaking world, I look on her book more favorably because of the sheer dearth of IKH material in publication in English, rather than true expository merit. As trading books go, it can be acquired for a relatively cheap price, and whatever its faults is indispensable for any IKH chartist without competency in Japanese.

Chris Capre holds a weekly webinar on FX Street called “The Weather Report” that covers the basics of IKH. As webinars go (always excruciatingly slow), the material is decent and Chris an able analyst, even if there is nothing so novel being presented as Chris suggests. But then, that’s the staple of anyone hawking fee-based mentoring, signals services and system packages via the “free” education carrot.

Out of time, so a chart for now, and the first formal installment this evening.