Ichimoku Technical Analysis Focus:

  • EURUSD Rate Looks To Ichimoku to Trigger Points of a Breakdown
  • Dollar Index Trying To Reverse (Mis)Fortunes
  • SPX 500 Momentum makes it difficult to buy the breakdown thesis

Learning a new indicator can make some trader’s head spin, especially when it comes to the seeming complexity of Ichimoku. Ichimoku provides five separate lines, but the lines provide a full outlook to help traders understand the path of least resistance, and to what direction the market appears to be favoring.

Want a full (& FREE) guide to walk you through Ichimoku? I created one here (click Advanced Guides)

Ichimoku has value in that it helps traders to see and trade in the direction of momentum. Retail traders, at least when looked through the lens of IG Client Sentiment, tend to fight strong trends. This means retail traders are often expecting the recent high price to be THE high before a big reversal. A cursory look at multiple Ichimoku charts helps you see that favoring trend continuation may be a more helpful outlook than constantly favoring a technical reversal.

EUR/USD – Possible Multi-Month Correction If Price Breaks Below Cloud

Please add a description for the image.

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

EUR/USD has enamored (and frustrated) many traders since the April first round French Election that saw EUR/USD breakout above 1.09 that failed to look back. When looking at Ichimoku, you can see a sustained bull-trend that had one small pull-back in September to early October before extending to the highest level since 2014 at 1.2556. The spot rate on EUR/USD is now 275 below that high, but traders can see Ichimoku highlighting a possible buying opportunity when combined with RSI(5).

The price is coming into the cloud as RSI(5) is showing oversold. A potential move higher back above the Kijun-Sen at 1.2380 would argue for trend continuation. The lagging line shown as a bold green is coming into support of previous chart components. The default view of Ichimoku is to prefer trend continuation after a pull-back of a strong trend like the one that took EUR/USD from 1.0340 in January ’17 to 1.2556 this year. Only a breakdown below the February low and near the 23.6% Fibonacci level of the ’17-’18 range would turn attention to the potential of a more aggressive pull back to either 1.2033 (23.6% retracement) or 1.1708 (38.2% retracement and September closing high.

A bullish continuation would favor an impulsive move higher as we’ve often seen in EUR/USD to the 61.8% Fibonacciextension as the minimum Elliott Wave target for wave v/5 at 1.2637 or an extended target of a 78.6% extension at 1.2931. Obliteration of the US Dollar would turn focus to an extended wave five at 1.3306, a 100% extension of the move from January ’17 to the September high drawn from the November low.

AUD/USD – Deep Correction May Turn Into Sell-Off

Please add a description for the image.

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

The market has spoken, and currently, the collective we do not want to bid AUD/USD through 0.8135 USD per AUD. The question now, when looked through the lens of Ichimoku whether or not the Dollar is done advancing against the Australian Dollar, thus soon to send AUD/USD higher or if the recent drop is a sign of things to come.

Ichimoku does a fine job of visualizing trend support and momentum. A price breakdown below the cloud alongside a momentum breakdown where the green line breaks below the cloud as well would favor the later view of an extended breakdown that would encourage looking for selling opportunities.

The classic use of technical analysis would look at the chart and favor a double-top pattern at the previous high seen in September ’17, which also proved resistance in May ’15. What should grab trader’s attention is how aggressively price has fallen since being rejected. The current level of support is 0.7800 with a further bearish target to 0.7405 (December low) if price breaks below the cloud and the lagging line follows. If the price bounces off the cloud or pierces briefly down to the 61.8% of the December-January advance at 0.7743, and then retraces, then bears should curve their enthusiasm.

USD/CAD – CAD Weakness Becomes FX Market Theme As Ichimoku Teases Breakout

Please add a description for the image.

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

The FX market does not allow for absolute valuations since currencies are traded in pairs. Therefore, when a trader is looking to express their view on a specific currency, the logical extension is to find a currency that best helps their view play out should the future unfold in a fashion they believe probable.

For traders looking for a rebound in the US Dollar, selling the Canadian Dollar to express that view has gained considerable attention, and for a good reason.

Recently, USD/CAD broke above the Ichimoku Cloud, which sat ontop of the 100-DMA at 1.2636. USD/CAD has traded to the highest level of ’18 by breaking above 1.2700, but many traders thing CAD weakness has more room to run.

The chart above applies 3-separate Fibonacci zones based on key price ranges that all have a key confluence around the 1.3105/51 price zone. The recent move higher off the January 31 low can look to the higher low of February 16 at 1.2450 as key support.

When looking at USD/CAD via Ichimoku, it’s worth noting that a breakout has not occurred with momentum backing the move higher until the lagging line has broken above the cloud. Such a move would require a close above 1.2790 or ~100 pips from the spot at the time of writing. While this may seem like too much rope to give a move on the charts before confirming a breakout, stronger trends are often confirmed with the lagging line cloud break, which opens great risk: reward entries if the trend plays out favorably. If it does not, the risk should be limited when compared to the potential reward of the trade.

USD/JPY – How Low Can/ Will It Go?

Please add a description for the image.

Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

Ichimoku tends to favor traders who like to have a checklist before entering into a trade. The cloud provides a trend filter. The lagging line gives you a momentum filter to support the trade. The mid-point lines can give you a timing aspect to your entry and resistance in a downtrend or support in an uptrend. For good measure, RSI(5) appears to be rolling over after extending higher to a reading of 58.

The former looks to be the case in USD/JPY. Of the charts we’ve covered with Ichimoku applied, USD/JPY is showing the clearest technical set-up, with bearish posture (price < cloud) and momentum (lagging line < price). Now, the price is coming up to the 26-period midpoint at 108.01.

So what are the price targets? Traders that like to utilize Fibonacci Expansions that are calculated from three key pivots are undoubtedly looking to 104.20. 104.20 takes the December ’16 high, April ’17 low, and November ’17 high and projects a 100% move. This type of target is known as an ABC extension and is common regarding technical patterns. An extreme breakdown would happen if price accelerates or doesn’t hold near 104.20, which could target a possible move back to 100, where price bottomed out around the US presidential election of 2016.

Another point that could show a big move is on the horizon is when looking to the correlation of USD/JPY and the Nikkei 225. The Nikkei is Japan’s large-cap equity index, and historically it carries a strong positive correlation to USD/JPY. Recently, the 60-day rolling correlation has broken down. Such a breakdown doesn’t last for long due to macroeconomic factors of Japans’ economy, but it does tend to precede a large move in USD/JPY.

Typically, Ichimoku favors trend continuation, so the bias of this possible signal is lower. But broadly speaking, volatility tends to follow when the correlation breaks down, so be on alert as I will.

New to FX trading? No worries, we created this guide just for you.

---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Communicate with Tyler and have your shout below by posting in the comments area. Feel free to include your market views as well.

Discuss this market with Tyler in the live webinar, FX Closing Bell, Weekdays Monday-Thursday at 3 pm ET.

Talk markets on twitter @ForexYell

Join Tyler’s distribution list.