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EURUSD - Are the Bulls Getting More Confident?
After 4 weeks trying to close below the weekly Kumo and 4 attempts to close below the 1.3500 big figure, are the bulls finally getting more confident they can hold the downside here?  This is an intriguing question as the pair did make a slightly higher high than the previous week.  So far, the pair is still caught between two walls; bottom = 1.3450 / high = 1.3800.  This is the major range which has to break before new players will really come into the market.  Until then, the pair is directionless and is accentuated by the flat Tenkan and Kijun suggesting the pair has no momentum and no trend in place at the moment.  The longer the pair remains in the Kumo, the more cloudy the picture remains.  The cleanest scenario is to dump out the bottom and start another leg of the downtrend which would be very tidy and consistent with the medium term structure.  Wait and see for now and intraday you can play the ranges.

GBPUSD - Going South to Start but a Test Remains Below
The pair has started this week under pressure as it opened and briefly went up only to sell off most of the latter portion of today.  Heading into Tokyo on Monday the pair is towards the lows so far so the pressure to the downside is on.  However we have this massive wick below which goes all the way to 1.4781 and starts at 1.5145 which is a whopping 360pips (give or take a few).  This large rejection could be the first sign of a short term bottom for the pound and you have to consider some players will try and use this bottom as an excuse to buy.  It should be noted this is a slightly aggressive play considering the pair has fallen 6 out of the last 7 weeks.  The Kumo above is claiming to be quite a ceiling for it being thick and consistent so upside gains will have to be well earned.

AUDUSD - Medium Upside Favored but Strange Pattern in Play
Gaining the last 3 out of 4 weeks, you have to think the pair is attempting to make another run towards the 09′ highs around .9400.  Short term support is below at the Tenkan/20ema meeting at .8930 but the upside is a little strange and speculative because we have an expanding triangle which is one of the lesser patterns to trade so short term upside may be limited by the potential trend-line at .9269.  Overall, the pattern is weak so very light plays are suggested at best.

USDCAD - At the Do or Die Line
The pair is almost there at the 09/10 bottom around the 1.0200 level and one has to wonder if its going to hold up a third time.  In one sense there will be traders totally tempted to make plays here as it has held up before so the risk is low and the upside is decent.  However, the pair has fallen 3 out of the last 4 weeks and the downside moves have been strong to solid.  The Tenkan and Kijun offer no information other than being flat suggesting the downside may hold as there is no momentum to support a major move at the moment.  However the 20ema is still sliding down reflecting the overall drift in the pair so upside plays require caution as they are fighting something that has yet to be tempered.

GBPJPY - Going for a Second Attempt at the Yearly Bottom * Alternate Chart
*We were getting tired of the NZDUSD so thought we’d take a look at another chart.

This pair is behaving somewhat like the GBPUSD as it opened the week and then started straight down for the bottom currently at the lows of this week.  The long wick below plays as both a magnet and possible area for aggressive buys to be parked but the overall pressure to the downside has yet to be relieved so you can take a higher risk play at last weeks low which was 132.38 and target the 135.00 figure with stops below.  Alternate scenario would be to place sell orders at this weeks high (right where last weeks high was with a stop and reverse play just above that level.  There are some interesting scenarios on both sides but so far the overall pressure is still down until it can break last weeks highs.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku and Price Action Courses for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

EURUSD - Stubborn as a Mule
To date, the pair has yet to close below the Kumo and has now posted 3 weeks of rejection from the 1.3500 level.  There are obviously buyers willing to challenge the seriousness of this downmove and are staking claim here at the 1.3500 level.  There has been several intraday probes below this level but all have been rejected and not one has had a daily close below.  The pair is stuck in an intraday range between 1.3420-ish and 1.3630 so until this breaks, the range dominates.  Mildly aggressive plays can be made on the outer edges of this range with tight stops.  Overall, with the Kumo flat for the next few weeks, we could easily see the pair stuck in this area till early April as it should act as a magnet for price.  However, we feel the longer term prospects are to the downside.  Should the pair stay solid and hold 1.3500 until April, then the buyers should have more confidence and push the pair up to the Senkou Span B which climbs for the rest of the summer but will likely have a short leash for bulls making a ceiling just below 1.3800.

GBPUSD - Further Downside Expected
As we wrote last week, ‘Should the pair close below last weeks low then a move towards 1.5000 seems in order.’

As the pair closed below the previous weeks low with a final print on Friday at 1.5246, the pair sold off from the beginning and never looked back as we wrote, tagging the 1.5000 barrier yesterday and dropping way below that hitting a daily low of 1.4782 which is quite a move.  We expect nothing but more sales for the pair and short term 1.5000 could act as resistance.  The weekly low last week at 1.5151 and the weekly open (this week) at 1.5246 will likely act as upside barriers.  We do not expect the pair to have a weekly close above 1.5500 for the rest of the summer with the Kumo being quite thick and flat from April - end of August.  With the pair selling off 7 out of the last 8 weeks, why would we buy?

AUDUSD - Quietly building
The aussie is under the radar building up some steam for the bulls as its had now 2 of the last 3 weeks closing up with the two being relatively close to the highs suggesting the pressure is steady.  Last week was a small down week but it found strong support at the Kijun which has now joined the Tenkan and 20ema at .8930 so this should act as a short term support for the pair.  So far we are at the weekly highs and the larger structure seems to be in play which is an awkward expanding Triangle (of sorts).  Overall we only like the dips to the 20ema or supposed Channel/Triangle top for now as possible plays.  Other than that, this thing is a mess and we really do not like these structures.

USDCAD - Part of the Commodity Mess
After two weeks of closing down, the pair found an uptick and challenged the Kijun which has been flat for several weeks.  However the air was too thin up there and the pair got rejected closing 150pips lower from the Kijun.  Since then, the pair has tested the 20ema and failed there now producing lows below the last two weeks.  We feel the only plays available are the 1.0200 region which could house some moderate buys there or selling at the Kijun/20ema combo.  Overall though the charts are a mess as only the Kijun is falling sharply with the 20ema dropping at a tortuga pace and the Tenkan is flat.

NZDUSD - Flat like the World Once Was
Stuck within a 200-300 pip range for the last 4 weeks, the pair is suffering from a malaise of having no idea where to go.  It obviously is respecting the 20ema which it has rejected off of now 2x and if the overall price action for the next few days is flat, there is no reason why we should not expect a third.  Ironically the Kijun is climbing while the 20ema and Tenkan are flat.  We do not expect the pair to eclipse the Kijun in the near future and the Kumo is not too far below so overall, this is a slow play to either side.  Do not expect much.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku and Price Action Courses for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

EURUSD – 3 Attempts and 3 failures

Tis now the third time the pair has tried to close below the Kumo bottom and third time it has failed producing a relative doji in last weeks price action. The pair tried to push up then down and went virtually nowhere. The market definitely digested the rate hike from the Fed but it seems like the pair is either consolidating its losses before another run or its really attempting to see if the bulls have the real strength to take the mantle.

For now, its under review with the overall downward structure unchanged but no new added momentum so we cannot get excited about being overly bearish. A rejection upon the 10ema is a decent short term aggressive play but until we get a weekly close below the 1.3500 figure, we are cautiously bearish and waiting for some new talent to arrive.

GBPUSD – Adding to the downside pressure
After holding in place and forming a relative inside bar, the pair sold off again closing just below the major intraday floor at 1.5550 which should act as a short term rejection area. If the last pattern holds, this week could trot in place but if the pair does not make it up above 1.6000 by late March, the falling Senkou Span B on the Kumo should exert downside pressure on the pair forcing lower ground. Should the pair close below last weeks low then a move towards 1.5000 seems in order. For now, momentum is slightly tilted down but nothing extravagant.

AUDUSD – Complex but wide channel with flat Momentum
There is not much about this picture which is pretty or consistent on either side. You have an expanding triangle which is a horrible pattern to trade, you have all three lines flat showing no momentum at all and lower lows which declined faster than the lower highs did so there is little consistency in the overall structure making only the wide levels worth playing. With that being said, there is the highs between 9400-9300 for shorts and the trendline bottom at .8700 for a potential buy. Declines are likely not to be heavy as the Kumo is thick, strong and building over time suggesting the breeze of the kumo should carry the pair up.

USDCAD – Failed above the Kijun, looking for a bottom
After closing above the Kijun for the first time in a long time, the pair failed to gain any new buyers and ultimately slammed back down below it, the 20ema and the Tenkan in less than two weeks. It the pair wanted to be tidy, it would head for 1.0200 where other buyers would likely be excited to scoop up the pair. We feel if you want to be a bull, then wait for 1.0200 or uber-strong signs of a bottom forming before going long. For bears, the 20ema is the only thing offering a play for now currently clocking in at 1.0595 with stops just above the Kijun.

NZDUSD – Showing the weakest strength against the USD
Gaining for two weeks but failing at the 20ema, the pair looks like it will use all three lines above as a test of strength to qualify the bulls desire to take control or concede it again. The pair is in a channel which is relatively stable so we have wide lines and shorter term lines for plays on both sides as the channel top and bottom offer reversal plays while the 20ema, Tenkan and Kijun offer tests for the upside and possible rejection plays. Should the pair remain in the channel till the Kumo, then it will either use it as a base for another run up or likely slam through it and head for the flat bottom.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku and Price Action Courses for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

EURUSD - holding on
The pair has had two downside rejections to break the weekly Kumo but yet upside price action has yet to become strong enough to make a case for a real reversal being attempted.  This could either be some profit taking in the short term before new positions build to the downside, or the bulls not really having enough strength to overwhelm the bears.

Either case, the pair remains in the Kumo so the picture will be a bit cloudy until we exit on either side.  The Tenkan suggests momentum is still down but slowed a bit and the Kijun has gone flat in the near term.  If they have their way, price should bounce around the Kumo but the pressure to the downside should still remain.  Watch for a weekly close below the Kumo and 1.3500 to strengthen shorts resolve.  A break above the 10ema will give bulls some short term hope.

GBPUSD - mixed salad but downside favored
Posting a mild gain last week, the pair has yet to produce any meaningful upside price action.  Last weeks gains were smaller than the last 11x the pair had a weekly gain so it suggests this is not due to bulls taking over by any means.  Its lackluster effort will need to be doubled before the bulls can gain some steam.  All the lines are relatively flat so their is no current momentum but the remaining downside inertia which will still have an effect on price.  The Kumo is week for the next month or so until April so it will not provide much of a challenge for either camp.  Its a mixed salad but more of the goodies appear to be towards downside plays.  Need more evidence this week to see where the bulls and bears hearts are.

AUDUSD - Impressive climb and now breaking above the 20ema
Forming an almost outside reversal bar, this is one of the pairs that may challenge USD strength.  Not surprising its a commodity pair and the AUD ta’ boot.

The pair held at the lows from two weeks ago and closed knocking on the 20ema’s door.  Since then it has virtually climbed today and is about to surpass the Tenkan line.  However, all three lines are flat so they are not offering too much of a fight for either camp and are remaining relatively neutral like Switzerland.  Should the pair close above all three lines, it could make a challenge for the 9300/9400 highs from 09′ and 10′.  However a close below the Kijun would challenge the previous lows just below .8600.  Need to see how the DOW does this week to see if the current strength will hold up.

USDCAD - Just not ready for higher levels
Close to making a case for some higher ground, the pair faltered last week and slammed below forming an evening star pattern of sorts but more importantly, last weeks losses took out the last two weeks of gains.  If the pair should continue to sell-off, we feel the next buy level will be just above 1.0200 which has held the last two attempts.  There is not much reason to be bullish in the short term but the bears appear to have some sort of near term control so its the only valid play out there - just not our favorite at current levels.  We’d rather be shorting closer to the 20ema so will wait for price to reach 1.0200 before we consider any real move.

NZDUSD - pulling up the rear
The underperformer for the commodity pairs, the kiwi reversed some of its losses for its first weekly gain in 4 weeks but it has yet to touch or breach the 20ema which is currently the lowest of the three lines which are currently all flat.  The pair appears to be caught up in a downward sloping channel which could be part of a bull flag in the larger scheme of things.  The pair has upside resistance in the three lines and the channel top so selling at the top of the channel seems the current viable option.  Not our favorite scenario so we will play the channel but this week has opened bullish as if it wants to challenge the 20ema.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku Course for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

One of the most difficult challenges for traders is finding entries and exits. Its an important question that needs to be answered and can determine if you are;

1. getting in at the correct location
2. can have your risk defined and as minimal as possible
3. have a clear location to take profit
4. and know how to protect the position

If any of these are challenging for you, then you will want to learn how to use pivot points.

Created by floor traders decades ago, they were used as a method to mark key levels of support and resistance. It started out with the daily pivot but morphed into other pivot levels the institutions are watching constantly on a daily basis. If I told you about 70-80% of all 1hr candles will touch a pivot level from the London open to the London close and sometimes even the NY close, would you pay attention to them? I’d hope so because price action’s constant contact with them suggests their potency as something that has to be respected.

Before we go into examples of them on the charts, we will go over their basic construction.

All the pivots start with the composition of the DP or Daily Pivot. The DP is calculated by adding yesterday’s high, low and close, then dividing them all by 3. The formula looks like this:

DP = (H + L + C) /3

If you think about it, some of the most important pieces of data from a price action perspective are yesterday’s high, low and close. The high and low mark the extremes of price for that day (or how far the market was willing to go) and the close measures the acceptance of price at a particular level, along with how much strength in the buying or selling there was (determined by the closes’ position to the high or low).

The remaining pivots are calculated by various multiples of the DP. The formulas are below:

s1 = DP - (H - DP);//S1
s2 = DP - (H - L); //S2
s3 = L - (H - L); //S3

r1 = DP + (DP - L); //R1
r2 = DP + (H - L); //R2
r3 = H + (H - L); //R3

To briefly define them, the S1, S2 and S3 are what we call support pivots (S = Support) and the R1, R2 and R3 are what we call resistance pivots (R = Resistance).

The S1 Pivot is the closest of the support pivots and the R1 the closest of the resistance pivots. The farther we go out (S2, S3, R2, R3) the further the pivots are from the DP.

A chart below will show what they are and how they relate to price.

In this chart we are looking at the USDJPY on the 4hr time frame. The red lines are Resistance pivots and the blue lines are Support pivots. The yellow lines are Mid-Pivots and are simply the halfway point between any two pivots.

So how do Pivots help you with Entries and Exits?
Simple. The institutions regard pivots as one of the most important things for placing intraday entries and exits. Price actions response to them confirms this but in regards to any other indicator out there, nothing has more contact with price action than pivot points (except a really short moving average which has little meaning to price at that point).

There are actually statistics out there which show how price will make contact with pivots 70-80% of the time (on hourly chart).

Lets take a look at the GBPUSD on the 30m chart below.

The grey line represents the London open (today Feb. 11th, 2010). We can see from the recent top why price today got rejected up around 1.5650/60 because of the last top there and price’s rejection at this level.

But what about the bottom? The previous bottom was 1.5573 which the two candles to the left had touched but today, price went another 15pips past them. Why did the two candles today go past them and why did the market reject or react so sharply to those levels?

Also, after bouncing off the bottom, price climbed to 1.5610 where two wicks to the topside formed and caused a small rejection. What was there to reject price in the past?
This exact same rejection level became a support level once price had broken it.

Take a look at the chart below and you will have the answer why.

As you can see, price went past the previous support level and touched the S1 (Support 1 Pivot). Treated it as support for two candles, then rejected off of it.

Where did it go to?
The M2 Pivot (Mid2 Pivot) and rejected twice off there. Once price broke this level, it then came back to do what? Treat the Mid-2 Pivot as support.

These types of reactions/responses from the market occur all the time on an intraday basis. They give the trader a much more precise level to enter the market for intraday trading while also giving us ideas for precise exits.

If you would like to learn how to use them for precise entries and exits for your intraday trading, learn what the % chance price will break any given pivot on any given day, learn what the % chance price will touch the next pivot after breaking one pivot, or how to spot key reversal and breakout strategies using pivots, then check out the Price Action and Pivot Point Course.

We have gone over one method to use the 20ema for getting into trends after they have materialized and gotten underway. In this article, we will talk about another common setup trends often form giving us as traders another method to get into trends.

The EMA Failure – With Trend Setup

As mentioned before, trends will often oscillate and provide minor pullbacks before resuming another leg of the trend. These moves can pullback to the 20ema, touch it and then continue trending. Another method is the EMA failure, where the trend will pullback to the 20ema, break it briefly, and then resume the trend. We will talk about this method and gives some examples.

It stands to reason the institutions are watching how price action responds to these moving average touches because the market so often responds to them in such a clear and undeniable fashion. If a moving average has acted as support (or resistance) during a trend, then when it breaks it, the market should or could reverse. However, more often than not, the institutions will often use this as an opportunity to get back in the trend. It is often the case after breaking counter-trend the 20EMA, it will shortly after slam back above (or below) it to resume the trend. Lets look at a few examples and talk about some common characteristics when this happens.

AUDUSD 4hr Chart

Moving in a solid consistent downtrend, the pair has had several touches off the 20ema treating it as resistance and a trend continuation signal. However, look at the middle of the chart where it breaks it for 2.5candles. Usually when something is treated as resistance and gets broken, the buyers come in thinking the trend is over or reversing. However, the market never did this as the price action after it barely gained ground only to slam back below the 20EMA and start another run. It did this a total of three times with the behavioural pattern the same each time.

GBPUSD 4hr Chart

Already in a strong downtrend, the pair pong’d off the 20ema once and sold off for another 28hrs straight, dropping 300pips in the process. However, take a look at what happened when it actually broke the 20ema for the first time and closed above it.

After closing above it, some traders might have gone long and quickly gotten trapped in this move after the pair on the following candle formed an outside reversal candle and then sold off 350pips in the next 48hrs. Not all EMA breaks are created equal and its important to realize when they are the real deal and when they are with-trend setups.

2 Key Points

The market will often exhibit two key characteristics when the 20ema break is a failure or a with-trend setup.

1. Time – the market spends a short period of time (3-4candles max) above the 20ema on the other side of the trend before breaking back above (or below) it in the direction of the original trend. This is the market showing with time that trend is still alive and about to start another leg
   
2. Reversal Slam – after breaking above the 20ema counter-trend, the market comes back with a vigor slamming back below (or above) the 20ema with trend to show their renewed energy to continue the trend. The strong price action move is confirmation with a lot of money from the institutions the trend is going to resume and this move is often highlighted with a reversal pattern of sorts as in the case below (outside bar)

   When you have the combination of the Time and Reversal Slam together on a counter trend 20ema break, it gives us traders a with-trend setup that is usually low risk and high reward but more importantly, a way to trade trends after missing the initial move.

   To learn more advanced price action setups, check out the Price Action and Pivot Point Course.

EURUSD - Only the Bottom of the Kumo
As stated last week;

The pair fell as expected to 1.3850 just 75pips above the weekly Kumo.  Although we feel the pair needs to correct a little bit, we ultimately feel any rallies are just opportunities to sell the pair higher.

Just as we wrote, the pair rallied to the big figure of 1.4000 and then dropped 350pips closed in the mid 1.36’s.  Posting its 4th weekly decline in a row, the pair only has the bottom of the Kumo to take out before a large drop should manifest.  Should we have a weekly close below the kumo, we are expecting a dive to the 1.2900 and longer term forecast could send the pair to 1.2400 by year end.  Outlook for the bulls on the EURUSD do not look good as the last bastion of Ichimoku support is the bottom of the kumo and beyond that the atmosphere is thin.

GBPUSD - Look out below…
Posting its largest weekly decline since sept. last year, the pair did two things which added to the bearish taste for the pair; 1) closed below the kumo for the first time in 6mos and 2) crashed below the major support at 1.5700 which was the last double bottom support for this pair in the last 10mos.  Ichimoku analysis suggests unless a rally happens in the next month or so, this pair could easily be headed for 1.4900 with 2nd targets at 1.4500 and possibly a full reversal of the 09′gains back to 1.3500.  Look out below as there is not much to help this pair.

AUDUSD - Cuidado as we are below the Kijun
For the first time since March of last year, we had our 1st weekly close below the Kijun.  We expect this along with the 20ema and Tenkan now to act as strong resistance so the line of least resistance has clearly formed to the downside and the bearish prospects have become attractive - especially with the RBA not raising rates last month and further concerns about inflation and a weakening labor market.  The kumo does not come in till about 8000 so there is plenty of room for this pair to drop.  Any rallies to the Kijun are likely good selling opportunities.

USDCAD - Working hard for its money
One of the few USD pairs having to work hard for its money, this pair had a doji week but nevertheless closed above the kijun and 20ema.  This week it used it as support and should it have a weekly close above 1.0800, we feel the pair could likely be headed towards 1.1250 which is where the Senkou Span A comes in (kumo bottom).  At that point it will have to work hard for its gains but for now, outlook is good for USDCAD bulls and as long as the dips are corrective in nature, the 20ema should hold as support for a good long base to form.

NZDUSD - Likely first to the weekly Kumo
With its 5th weekly down close and now 2nd below the Kijun, the pair is likely headed for further losses towards 6500 as it spiked up to the Kijun only to get smacked back down 300pips lower.  The 20ema has now gotten below the Tenkan and Kijun so this should reject any upside plays.  The line of least resistance is clearly to the downside and we would not feel good about buying this pair anytime soon.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku Course for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

EURUSD - Kumo Below, but nothing special

As stated last week;
The problem for the EURUSD is more about a lack of support combined with clear lines of resistance.  This along with the Kumo now way below at 1.3770 suggests the first major attempts to support this pair will not come for another 275pips below or more.

The pair fell as expected to 1.3850 just 75pips above the weekly Kumo.  Although we feel the pair needs to correct a little bit, we ultimately feel any rallies are just opportunities to sell the pair higher.

For now, the lines of least resistance are still to the downside and with the pair posting its 2nd largest weekly decline in the last 9mos, we feel this selling pressure should continue till the end of Feb.

GBPUSD - About to be…
Who really wants to be buying the pound now?  We really cannot find any reason to buy it both technically or fundamentally.  From an Ichimoku perspective, the pair is threatening to spill out to the downside of the Kumo and we feel with the likely USD strength to come, the pair will eventually submit.  The Tenkan is diving like a shark smelling blood below and the 20ema is also resistance above so the line of least resistance is still to the downside.  Should the pair remain below the Kumo till early April, the prospects for a serious dive below 1.5300 becomes more likely as time goes on with the Kumo getting thick and strong to the downside with a flat bottom below at 1.5300.

Until then, the twisted thin Kumo does not offer much for support or resistance so we feel the lines will have the most influence over the pair.

AUDUSD - Only one more to go
Selling off about 250pips last week, closing towards the lows and breaking below the 20ema, the pair now only has one more major downside support-line and price to go before a strong fall can begin.  Opening off the Kijun (red line) the pair has found some strength and is checking the 20ema for legitimacy.  Should it break this, the Tenkan will come under threat so the pair is in between two opposing forces.  Unless the pair gets really strong this week, we feel another challenge of the Kijun will be in order this week or next.  Should the pair break this and the .8733 support base (previous bottom), then we feel the pair is headed south for a while, likely towards the Kumo top before finding any support which will likely not come in till .8250-ish.

USDCAD - Doing an About-Face
After having its 2nd largest weekly gain in the last 7mos, the pair closed above the 20ema and Kijun.  However, USD selling this week has brought the pair below both lines and we feel dips will likely find support at the Tenkan line.  This could where the bulls re-enter to make a second skirmish towards the 20ema and Kijun.  Should we have a 2nd weekly close above these lines, we feel technical buyers will come in to launch the pair up towards the Senkou Span A which should not come until after 1.1000.  We are liking dips on this pair as buying opportunities.

NZDUSD - Next to the EURO…
This pair looks like its in 2nd to last place against the USD with only the EURUSD looking worse.  Why?  The pair has sold off for 3 straight weeks but just closed below the Kijun and 20ema for the first time in over 6mos.  Now all three lines will act as resistance so the line of least resistance is clearly to the downside.  Ultimately, unless the .6969 support base holds (should the pair fall further), we feel the pair is headed for a much lower value, possibly to .6500 before finding any major buyers.  There have been some bullish statements by Bollard (Head of RBNZ) which may give the pair a lift but we feel it has more work finding higher ground than lower pasteurs.  The only thing which would change our bearish view is a weekly close above the Tenkan.

Chris Capre is the current Fund Manager for White Knight Investments (http://whiteknightfxi.com/). He specializes in using Ichimoku, Momentum, Bollinger Band, Pivot and Price Action models to trade the markets. He has built Ichimoku Systems for Institutions and has an Advanced Ichimoku Course for further training.  For more information about his services or his company, visit http://2ndskiesforex.com

One of the amazing things about the Ichimoku Cloud is the actual Cloud or ‘Kumo’ which is something unique wherein nothing like it was created before and nothing sense has come after. The Ichimoku Cloud or Kumo is designed to represent support or resistance but in a different form the western world has seen – to view support and resistance as evolving or dynamic and not static like pivot lines, Fibonacci lines, support lines or trend lines.

To the creator (Goichi Hosada), support and resistance was evolving and really based upon previous price action. Particularly, the highs and lows of previous price action was of great concern to Hosada (along with the opens and closes) which showed levels of rejection where the market would not accept price. The previous highs and lows would also give traders the range where the market was accepting price.

So the real question is ‘how’ does the Ichimoku Cloud or Kumo represent support and resistance? The answer lies in the construction of the Cloud or Kumo.

Kumo Composition

There are two main lines of the Kumo which are referred to as Senkou Span A and Senkou Span B.  For the purposes of efficiency, we will refer to them as Span A and Span B.  The space or value in between these two lines is what forms the Kumo.

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

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), dividing that by 2 and plotting that 26 time periods ahead.  The formula is;

(Highest High + Lowest Low for the last 52 periods) / 2 and plotted 26 time periods ahead.

Now, before we fully get into the construction of the Kumo, we have to talk about what the Tenkan and Kijun lines are which help to form the ever changing Senkou Span A.

The Tenkan Line or Tenkan Sen (Sen means line in Japanese) is known as the conversion line or turning line is similar to a 9SMA but actually is quite different.  Remember a SMA (simple moving average) will smooth out all the data and make it equal but the Tenkan Line will take the highest high and lowest low over the last 9 periods.  The explanation for this is Hosada felt price action and its extremes were more important than smoothing any data because price action represented where buyers/sellers entered and directed the market, thus being more important than averaging or smoothing the data out.  As you can see by the chart below, the Tenkan Line is quite different than a 9SMA.  Because the TL (Tenkan Line) uses price instead of an averaging or the closing prices, it mirrors price better and is more representative of it.  You can see this when the TL flattens in small portions to move with price and its moments of ranging.

The Kijun Line (or Kijun Sen) is known as the datum line, standard line or trend line designed to indicate the overall trend for the instrument or pair.  The formula behind it is the same as the Tenkan line using price action and the highest high + lowest low with the only change being in the periods as it does it over the last 26 periods.

Why 26 periods?  The answer to that is a matter of history.  When the Ichimoku was first created, the Japanese markets were open 6 days a week on Saturdays.  If the markets are open 6 days a week, this generally results in 26 trading days for the month - hence 26 periods for the Kijun.  In essence, what it was meant to be was a measure of the highest high + lowest low for the last month of price action.  If the Kijun has been climbing - it means price has been gaining ground for the last month.  If it is flat, then it will be the midpoint of the range of price for the last month of price action (or representative of the price equilibrium).

Now that we have uncovered the composition of the Tenkan and the Kijun lines, lets talk about how they form the Senkou Span A.

Going back to its construction:

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

So the Tenkan line (which is the momentum line) and the Kijun line (which is the trend line) that are based upon price action are moving. Their valued added together, divided by 2 and sent 26periods ahead is what forms the Senkou Span A or Span A. So the first portion of the Ichimoku Cloud or Kumo is based upon evolving price action lines which are half momentum, half trend monitoring. When you put these two together, you get the Span A which is always changing based upon the acceleration or deceleration of price based upon how they effect the Tenkan/Kijun lines (and in turn, the Senkou Span A).

The second line is the Senkou Span B which is a little different. Its based solely upon price action, particularly the last 52 candles of whatever time period you are on. If you are working with a daily chart, we are talking about the last 52 days, for a 1hr chart, the last 52 hours of price action. After taking the high and low for the last 52 candle range, it takes their values, divides them in half, and shoots them 26 time periods ahead.

The shading in between is called the Cloud or Kumo.

Why 26 periods?

The answer to that is a question of history. Originally, when the Ichimoku Cloud was built, Hosada was mostly using it off of daily charts. The Japanese were trading 6 days a week so 26 days would represent a full month of trading. Hence 26 time periods to see where future support and resistance would be one month out.

This is where we can use the Ichimoku Cloud for reversals.

If the Ichimoku Cloud or Kumo represents support and resistance, then the thicker the Cloud, the thicker the S/R it offers. If price is below the Kumo, it will act as resistance, if price is above the Kumo, it will act as support. The Cloud can take many forms and shapes (virtually infinite) which is what makes it tricky but thick Kumo’s often will reject price and the longer the time frame (4hr, Daily, Weekly), the more powerful the Kumo will act as support or resistance.

Take a look at some examples below.

USDJPY 4hr Charts

Notice how the pair rejects off the really thick Cloud but when it reverses is where the Cloud was the weakest or most thin.

USDCAD 4HR Charts

Taking a look at another example, the USDCAD after its initial fall, rejected off a really thick Kumo twice telling us a reversal was less likely. However the Kumo starts to thin out giving us a window to break through the Kumo and likely reversal point.

So the key tactic in both is to look for thinner Cloud formations which offer a window or glimpse into an upcoming reversal. Remember the Kumo is sent 26time periods ahead so you have plenty of warning when the window is opening. If you are in the current trend, the window in the Kumo could be a warning to take some profits or if you are looking for a reversal, then the Cloud offers you a good location and method to time a reversal which is one of the hardest things to do in trading.

Another clue hidden in the Cloud can be the flipping of the Senkou Span A and B which can indicate a reversal but do not always. The other main point is price does not always reject off a thick Kumo so its important to watch price action as well but the Ichimoku Cloud is excellent at spotting and timing reversals.

To learn more about the Ichimoku Cloud, or proprietary quantitative based strategies on the Ichimoku Cloud, check out the Advanced Ichimoku Course.

Using the Ichimoku Cloud to discover Reversals

One of the amazing things about the Ichimoku Cloud is the actual Cloud or ‘Kumo’ which is something unique wherein nothing like it was created before and nothing sense has come after. The Ichimoku Cloud or Kumo is designed to represent support or resistance but in a different form the western world has seen – to view support and resistance as evolving or dynamic and not static like pivot lines, Fibonacci lines, support lines or trend lines.

To the creator (Goichi Hosada), support and resistance was evolving and really based upon previous price action. Particularly, the highs and lows of previous price action was of great concern to Hosada (along with the opens and closes) which showed levels of rejection where the market would not accept price. The previous highs and lows would also give traders the range where the market was accepting price.

So the real question is ‘how’ does the Ichimoku Cloud or Kumo represent support and resistance? The answer lies in the construction of the Cloud or Kumo.

Kumo Composition

There are two main lines of the Kumo which are referred to as Senkou Span A and Senkou Span B.  For the purposes of efficiency, we will refer to them as Span A and Span B.  The space or value in between these two lines is what forms the Kumo.

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

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), dividing that by 2 and plotting that 26 time periods ahead.  The formula is;

(Highest High + Lowest Low for the last 52 periods) / 2 and plotted 26 time periods ahead.

Now, before we fully get into the construction of the Kumo, we have to talk about what the Tenkan and Kijun lines are which help to form the ever changing Senkou Span A.

The Tenkan Line or Tenkan Sen (Sen means line in Japanese) is known as the conversion line or turning line is similar to a 9SMA but actually is quite different.  Remember a SMA (simple moving average) will smooth out all the data and make it equal but the Tenkan Line will take the highest high and lowest low over the last 9 periods.  The explanation for this is Hosada felt price action and its extremes were more important than smoothing any data because price action represented where buyers/sellers entered and directed the market, thus being more important than averaging or smoothing the data out.  As you can see by the chart below, the Tenkan Line is quite different than a 9SMA.  Because the TL (Tenkan Line) uses price instead of an averaging or the closing prices, it mirrors price better and is more representative of it.  You can see this when the TL flattens in small portions to move with price and its moments of ranging.

The Kijun Line (or Kijun Sen) is known as the datum line, standard line or trend line designed to indicate the overall trend for the instrument or pair.  The formula behind it is the same as the Tenkan line using price action and the highest high + lowest low with the only change being in the periods as it does it over the last 26 periods.

Why 26 periods?
The answer to that is a matter of history.  When the Ichimoku was first created, the Japanese markets were open 6 days a week on Saturdays.  If the markets are open 6 days a week, this generally results in 26 trading days for the month - hence 26 periods for the Kijun.  In essence, what it was meant to be was a measure of the highest high + lowest low for the last month of price action.  If the Kijun has been climbing - it means price has been gaining ground for the last month.  If it is flat, then it will be the midpoint of the range of price for the last month of price action (or representative of the price equilibrium).

Now that we have uncovered the composition of the Tenkan and the Kijun lines, lets talk about how they form the Senkou Span A.

Going back to its construction:

Span A is formed by taking the Tenkan Line and adding it to the Kijun Line (white and red lines respectively from chart above), then dividing that value by 2 and plotting it 26 periods ahead.  The formula is;

(Tenkan Line + Kijun Line) / 2 placed 26 periods ahead

So the Tenkan line (which is the momentum line) and the Kijun line (which is the trend line) that are based upon price action are moving. Their valued added together, divided by 2 and sent 26periods ahead is what forms the Senkou Span A or Span A. So the first portion of the Ichimoku Cloud or Kumo is based upon evolving price action lines which are half momentum, half trend monitoring. When you put these two together, you get the Span A which is always changing based upon the acceleration or deceleration of price based upon how they effect the Tenkan/Kijun lines (and in turn, the Senkou Span A).

The second line is the Senkou Span B which is a little different. Its based solely upon price action, particularly the last 52 candles of whatever time period you are on. If you are working with a daily chart, we are talking about the last 52 days, for a 1hr chart, the last 52 hours of price action. After taking the high and low for the last 52 candle range, it takes their values, divides them in half, and shoots them 26 time periods ahead.

The shading in between is called the Cloud or Kumo.

If the Ichimoku Cloud or Kumo represents support and resistance, then the thicker the Cloud, the thicker the S/R it offers. If price is below the Kumo, it will act as resistance, if price is above the Kumo, it will act as support. The Cloud can take many forms and shapes (virtually infinite) which is what makes it tricky but thick Kumo’s often will reject price and the longer the time frame (4hr, Daily, Weekly), the more powerful the Kumo will act as support or resistance.

Take a look at some examples below.

USDJPY 4hr Charts
Notice how the pair rejects off the really thick Cloud but when it reverses is where the Cloud was the weakest or most thin.

USDCAD 4HR Charts
Taking a look at another example, the USDCAD after its initial fall, rejected off a really thick Kumo twice telling us a reversal was less likely. However the Kumo starts to thin out giving us a window to break through the Kumo and likely reversal point.

So the key tactic in both is to look for thinner Cloud formations which offer a window or glimpse into an upcoming reversal. Remember the Kumo is sent 26time periods ahead so you have plenty of warning when the window is opening. If you are in the current trend, the window in the Kumo could be a warning to take some profits or if you are looking for a reversal, then the Cloud offers you a good location and method to time a reversal which is one of the hardest things to do in trading.

Another clue hidden in the Cloud can be the flipping of the Senkou Span A and B which can indicate a reversal but do not always. The other main point is price does not always reject off a thick Kumo so its important to watch price action as well but the Ichimoku Cloud is excellent at spotting and timing reversals.

To learn more about the Ichimoku Cloud, or proprietary quantitative based strategies on the Ichimoku Cloud, check out the Advanced Ichimoku Course.