Thursday, August 04, 2016

Tech Talk: The Ichimoku Cloud

By Peter McKenzie-Brown
Japanese journalist Goichi Hosoda developed the ichimoku cloud and published the idea in the late 1960s. It interprets information taken from candlestick charting.

The body of this chart suppresses all the usual indicators I use, to highlight the Ichimoku cloud, which is what I want to illustrate. The cloud itself consists of pink and green patterns, but it also has indicator lines in blue, red and green.

In this case, it applies to Fossil Group Inc. (FOSL), the purveyor of consumer fashions and accessories under labels such as Fossil, Diesel, Adidas and Burberry. Since October 2014, its share price has dropped by more than $100 – $60 since last August. Today the share has a price-to-book of 1.5, and a 20-per-cent return on equity. In fundamental terms, that makes it quite attractive.

Full disclosure: I recently bought some, based on the stock’s double bottom (share prices are now trading through the resistance they established last January 20th) and the little green cloud on the far right of the chart.

The trend is up when prices are above the cloud’s future-based projection, down when prices are below the cloud and flat when they are in the cloud itself. The cloud is the most prominent feature of the Ichimoku Cloud plots.

There are two ways to identify overall trend using the cloud. The trend is up when prices are above the cloud, down when prices are below it and flat when prices are within. Techies see the uptrend as stronger when the green cloud line is rising and above the red cloud line. This situation produces a green cloud. Conversely, they worry when the green line is falling and below the red line – a situation which produces a pink cloud. Because the cloud projects activity 26 days into the future, it offers a glimpse of future support or resistance. In this case, the green cloud seems to suggest that prices are about to rise. 

Of course, I could be wrong. I never make buy or sell recommendations.
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