Ichimoku Alignment/Divergence: Observations
Definition of Ichimoku terms: Alignment and Divergence
Ichimoku Cloud: Divergence Examples
Ichimoku Cloud: Alignment Examples
Ichimoku Cloud Alignment Implications
There are two main types of Ichimoku Cloud patterns across the EURX and USDX indices: Alignment and Divergence. Each of these patterns brings with it certain trading conditions so that a knowledge and understanding of these patterns is most helpful for any trend trading.
I have observed a few such periods of ‘Alignment’ and ‘Divergence’ now and consider that I am able to formulate and report on some fairly valid observations.
2. Definition of Ichimoku terms
Ichimoku Cloud Alignment: By this I mean that the Index charts are aligned for either ‘risk on’ or ‘risk off’.
- price is above the Cloud on the EURX for both daily and 4hr time frames AND
- price is below the Cloud on the USDX for both daily and 4hr time frames.
- price is above the Cloud on the USDX for both daily and 4hr time frames AND
- price is below the Cloud on the EURX for both daily and 4hr time frames.
Alignment is quite rare but offers enhanced trend trading conditions and so should be harnessed at the earliest possibility.
Ichimoku Cloud Alignment often results in:
- More reliable TC trend signals on the 4hr time frame.
- Longer duration trends from any TC signals.
- TC signals that deliver a large number of pips (often in the order of hundreds)
- A less choppy and, thus, safer trend- trading environment.
Ichimoku Cloud Divergence: By this I mean that the Index charts are NOT aligned for either ‘risk on’ or ‘risk off’. During Cloud Divergence you will notice price on the indices being in a more random configuration with respect to price being above or below the Ichimoku Cloud. There will be no overall bias, clear direction or pattern.
Ichimoku Cloud Divergence often results in:
- Fewer TC signals on 4hr time frame.
- Better and more reliable TC signals off shorter time frame 30 min charts during the US session.
- Less reliable TC 4hr trend signals.
- Shorter duration trends from any TC signals.
- A choppier and riskier trading environment.
3. Ichimoku Cloud: Divergence Examples
There have been many periods that support these Ichimoku findings but I have posted just a few coming from December 2016, April, May and September of 2012, January of 2013 and February 2013. I will provide examples and charts from each of these periods in the space below.
- December 2016: Ichimoku Cloud Divergence: Example 1
Ichimoku divergence was note on December 3rd in my weekly FX Index update and there were great 30 min chart trades that triggered on the following Monday:
EUR/USD 30 min: gave 130 pips and is back above 1.07. If the US$ retreats back below 100 then we may have seen the lows here:
EUR/AUD 30 min: gave 150 pips. Watch today with the RBA rate update:
EUR/JPY 30 min: gave 220 pips:
AUD/USD 30 min: gave 40 pips. Watch today with the RBA rate update:
USD/TRY 30 min: I Tweeted on Tuesday 6th to watch for any trend line breakout on the USD/TRY and this evolved during the late Europe/US session and gave around 700 pips. The chart from my initial Tweet and then following the breakout (b/o) move are shown below:
Further signals were triggered during Wednesday’s 7th December European and US sessions:
Gold 30 min:
Silver 30 min: 40 pips here:
DJIA 30 min: 250 pips
FTSE 30 min: a huge run here!
ASX-200 30 min: 320 here:
DAX 30 min: a huge haul here too:
USD/TRY: this tested and broke the 3.40 level as discussed per yesterday’s article. Note the move below the 4hr Cloud. I suspect 3.40 would be tested again before any potential bearish follow through and 3.10 would be an ultimate target to test:
USD/TRY 15 min:
- September 2015: Ichimoku Cloud Divergence: Example 2
I noted this morning how the FX indices charts were divergent on their 4hr and daily time frames and that this is a warning for FX traders of EUR and US$ based pairs.
USDX daily Cloud: price is below the daily Cloud:
USDX 4hr Cloud: price is above the 4hr Cloud, hence, the divergence.
EURX daily Cloud: price is dipping into the daily Cloud:
EURX 4hr Cloud: price is below the 4hr Cloud, hence, the divergence for the time being. That is, until price drops below the daily Cloud:
This kind of FX Index divergence often creates choppy trading conditions on the 4hr charts and better conditions on the 30 min charts during the US session. The following 30 minute chart of the EUR/USD is further evidence towards this observation. The last two trading sessions have offered much better trading during the US session off the shorter time frame charts.
E/U 30 min:
- April 2012: Ichimoku Cloud Divergence: Example 3
EURX and USDX: April 2012 was a very choppy period for trend trading from the 4hr charts. During this period price action on both the EURX and USDX was embedded in the Ichimoku Cloud on the daily time frames. Price was embedded in the Cloud for much of the month on the EURX and USDX for the 4hr time frame as well.
Currency pairs: All of the major pairs revealed very choppy patterns throughout this time frame.
- Feb – May 2013: Ichimoku Cloud Divergence: Example 4:
30 minute chart trades from the US session:
This 4 month period of choppy markets presented many opportunities for better trading from the 30 minute charts during the US trading session. Many of these opportunities came on the S&P500 where SPY day trades were possible. Other opportunities also came from the main currency pairs. Some examples of these from mid May are shown below:
E/U 100 pips
E/J: 150 pips
A/U: 150 pips
G/U 70 pips
U/J: the star of the night @ 150 pips
SPY trades: There are many great S&P500 trading opportunities during the US session in these divergent periods too. One example of these is given here: For this trade my TS signal came through when the S&P500 was at $1,588:
4. Ichimoku Cloud: Alignment Examples
- October 2015: Ichimoku Cloud Alignment: Risk Off: Example 1
EURX and USDX: The FX indices fell into ‘risk off’ alignment on October 22nd 2015. This alignment resulted in a 600 pip fall on the EUR/USD pair that was also observed with a triangle breakdown:
USDX daily Cloud:
USDX 4hr Cloud:
EURX daily Cloud:
EURX 4hr Cloud:
E/U 4hr: a 600 pip move once alignment kicked in:
- May 2012: Ichimoku Cloud Alignment: Risk Off: Example 2
EURX and USDX: May was a fantastic trading period offering almost a full month of alignment towards ‘risk off’. The EURX daily and 4hr charts show that price was below the Cloud for most of the month. By contrast, the USDX index traded above the Cloud for most of the month on the daily and 4hr time frame.
Currency pairs: All of the major currencies showed great SHORT trending opportunities. An exception back then was the EUR/AUD though. During this time the Euro and AUD were quite highly correlated so the EUR/AUD was not an appropriate pair to trade under these circumstances.
- September 2012 Ichimoku Cloud Alignment: Risk On: Example 3
EURX and USDX: The first two weeks of September 2012 were great for ‘risk on’ trading. The EURX daily chart shows that price was above the Cloud for those two weeks. By contrast, the USDX index traded below the Cloud for the same time period.
Currency pairs: All of the major currencies showed great LONG trending opportunities for the 2 week period. An exception back then continued to be the EUR/AUD though.
- January 2013 Ichimoku Cloud Alignment: Risk On: Example 4
EURX and USDX: I had been watching and waiting for, and writing about, this Cloud alignment for some weeks prior to its arrival. The pity for me was that I was away when the trends started and missed the first and best entries. I feel I’ve learned a lot over the 10 days since this alignment kicked in so I’m putting my thoughts down now. By doing this I hope to have a permanent record that I can refer back to so that I don’t make the same mistakes again.
The Ichimoku Cloud alignment kicked in towards the end of the fourth week of January 2013 on Jan 25th. This was the Australia Day Long weekend and we headed away for four days on the Friday morning, the morning when I noticed new TC signals underpinned by the alignment momentum move. The momentum move lasted for the whole of the following week as well and this is the time point I’m at now as I write. This alignment is still in place and so momentum may continue. One thing is for sure and that is that I’ll be watching for it. I will update my notes here for each week that the Ichimoku Cloud alignment is in place.
The alignment faded during the first week of February meaning that this optimum trending environment only last for about a week and a half or about 10 days. It has become very clear to me that these trending periods need to be embraced quickly to mamimise profits.
The moves during the first week of Cloud alignment delivered 1,470 pips on just the E/U, E/J and EUR/AUD alone. That is equivalent to 3 months worth of trading being achieved in just one week! That is a spectacular haul of pips and, the alignment has not waned as yet. There may be many more pips to come! The Cloud alignment that produced these great moves below only lasted for about a week and a half but delivered a huge amount of pips.
E/U: As at 3/2/13: The E/U moved from the weekly 200 EMA, at the 1.335 level, to end up spiking the 1.37 level during the first week of Cloud alignment. That was a move of 350 pips. I had been emphasising to watch for a break up from the weekly 200 EMA for weeks. This break came on the day we left for holidays!
As at 5/2/13: The EURX and USDX were both approaching possible major road blocks. It was not surprising then to see a little bit of a retrace and some risk on creep into the market during the Asian session on the Monday to start the week. It was not at all surprising then to expect, and see, some pull back with the E/U, E/J, EUR/AUD and the S&P500. This gave a fairly clean SHORT and counter trend trade opportunity off the 30 min charts during the late London and US trading session. This short trade gave an 85 pip haul though:
E/J: As at 3/2/13: The E/J had been bouncing around the key S/R level of 120 for about a week or so and this was a level I had been stressing to watch for. A new TC signal came as price punched through this 120 level and then rallied to the 127 level. This was a move of 700 pips that also came through on the day we left for holidays. The 123 level was the key level during the next week and price bounced around here for a bit before finally heading to the 127 level. One thing I have noticed here over the last week is that major levels get re-tested, often more than once. So, you either need a wide stop and to be patient or you could trade each of these moves several times.
EUR/AUD: As at 3/2/13: The 1.28 level had been a major S/R level for this pair and one that I had been stalking for some weeks. Price produced a new TC signal and moved up through this 1.28 level…you guessed it…on the day I left for holidays. Price rallied from there over the next week to finish up almost near the 1.32 level. That was a move of over 400 pips. The 1.3 level was the level to watch for during the following week when I came back from holidays. Price bounced around there for a bit before finally taking off. Yet again, major levels were being re-tested.
S&P500: As at 3/2/13:The S&P500 moved from the 1,487 level to the 1,507 level during the week of Ichimoku Cloud alignment. These ‘risk on’ periods offer great trading opportunities for stocks and Option as well as currencies. Consider buying Stocks, CFDs, Futures or Calls during ‘risk on’ alignment. Consider buying Puts during ‘risk off’ alignment.
As at 5/2/13: The S&P500 had made new highs in the last week and been bullish for some time. With the EURX and USDX were both approaching possible major road blocks it was not surprising then to see a little bit of a retrace with the S&P500. This did occur and it gave a great opportunity to capture this short move with a SPY ETF trade using Put options. The S&P500 gave a TC SHORT signal when the S&P500 was at 1,502:
I would have looked to buy the Feb $150 Put. This Put opened @ $0.82 cents and finished at time of this processing @ $1.46. That is an increase of $0.64 cents
The ROIC for this trade is ROIC= (0.64/0.82) x 100 = 78%. That is a great return for just one day!
5. Ichimoku Cloud Alignment Implications
My mismanagement of trades during the January 2013 Cloud alignment has prompted me to write down these reflections as key learning points. By doing so, I hope to avoid making the same mistakes again when there is the next wave of Cloud alignment.
- Trust my TC signals during Ichimoku Cloud alignment.
- Don’t tighten STOPs too soon.
- Realise that major levels will often be re-tested, even during major momentum moves.
- Make the most of Cloud alignment TC signals and situations.
- Cloud alignment offers great trending trades with more reliable trading signals: why trade all year when there is more safety and better profits during Ichimoku Cloud alignment periods?
- Ichimoku Cloud alignment offers great directional trading opportunities for Stocks and Options as well. These bigger moves may be better captured by the buying of Calls or Puts rather than just the selling of Puts. This may give traders more scope to participate in gaining more of the the breadth of the market move. Ichimoku Cloud alignment offers opportunities for possible quick counter trend trades as well during short periods of exhaustion during the main trend. These opportunities are best looked for on the highly traded instruments, such as the E/U or SPY ETF, on 30 min chart time frames AND during the London and US trading session.
- Focus on Stock or Call buying opportunities during ‘Risk On’ alignment.
- Focus on Put buying opportunities during ‘Risk Off’ alignment.