There are a number of ominous signs in the current stock market. Among those signs is the fact that clouds are hanging over the stocks that led this bull market. A breakdown in the leadership of the stock market could be an indicator that the bull market is near an end.
The leaders in the current bull market have been the FAANG stocks – Facebook (Nasdaq: FB), Amazon.com (Nasdaq: AMZN), Apple (Nasdaq: AAPL) Netflix (Nasdaq: NFLX) and Alphabet (Nasdaq: GOOGL), the parent company of Google.
The chart of FB below demonstrates the clouds over these stocks.
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Ichimoku Cloud charts are designed so that traders can identify the direction of the trend with one look. Traders can also spot important price levels to watch in the future that will tell them when the trend has most likely reversed.
At first glance, Cloud charts can appear to be confusing, but many traders also find them to be interesting because they appear to contain so much information and to present that information effectively.
Below is a daily chart of AMZN with all of the components of the Cloud system.
The most prominent feature on the chart is the shaded areas. These are the clouds. There are actually five components of the chart and the construction of the Could Chart can be summarized as follows:
- Turning Line, which is the midpoint of the high and low of the last 9 sessions.
- Standard Line which is the midpoint of the high and low of the last 26 sessions.
- Cloud Span A is the midpoint of the turning line and the standard line and is shifted forward by 26 bars.
- Cloud Span B is the midpoint of the high and low of last 52 sessions and is also shifted 26 bars forward.
- The Lagging Line is the price line the (the closing price) shifted backwards by 26 bars.
Each of these components is also known by other names. The Turning Line is called the Tenkan-sen or the Conversion Line in some sources. The Standard Line is the Kijun-sen or Base Line. The Lagging Line is also known as the Chikou Span or the Lagging Span.
The lines forming the clouds also have several names. Cloud Span A is also known as the Senkou Span A or Leading Span A. This line forms one of the two Cloud boundaries. It is called “Leading” because it is plotted 26 periods in the future. Cloud Span B, also known as the Senkou Span B or Leading Span B, is also plotted 26 periods in the future.
When Cloud Span A is above Could Span B, the area between the two lines is shaded in green. Red shading is used when Cloud Span B is above Cloud Span A.
While there appears to be a lot of lines in the chart, the interpretation of the Clouds is actually fairly straightforward:
- Prices above the cloud indicates a bullish picture.
- Prices below the cloud indicates a bearish trend.
- Prices in the cloud are bullish if they came from the bullish zone (above the cloud).
- Prices in the cloud are bearish if they came from the bearish zone (below the cloud).
- Historically thick clouds after a run up in price might signal an imminent trend change.
- The Lagging Line crossing the cloud confirms that a trend change has occurred.
These rules explain the idea of “one glance” chart interpretation. At a glance, traders will know whether prices are above or below the cloud. If they are in the cloud, the preceding trend will be easy to spot. The thickness of the clouds is also easy to spot. In the chart above we can see the cloud is thickening as prices topped.
Even Good News Can’t Clear the Clouds
The Lagging Line can be difficult to spot in the clouds. In the next chart, which shows Netflix, the other lines have been turned off to allow for an easier interpretation.
Here we can see the Lagging Line confirms the bearish outlook and prices are below the clouds. This is a bearish chart.
The fact that NFLX is bearish in the chart may be surprising. The company recently reported earrings that pushed the stock up nearly 10% in one day.
Earnings per share of 89 cents were well above analysts’ expectations for earnings of 68 cents per share. The company added almost 7 million new subscribers including 1.09 million in the U. S. where analysts had expected just 673,800 new subscribers.
The number of international subscribers grew by 5.87 million, well above expectations which had been for growth of 4.46 million subscribers. Netflix had an amazing quarter, yet the stock was unable to hold onto the gains that followed the news.
Four of Five FAANGs Are Bearish
The next chart shows GOOGL and the pattern is now familiar with prices below the clouds, a bearish indicator.
AAPL does offer some hope to traders since it is still bullish on the Ichimoku chart. However, prices have moved into the cloud while the relationship of the turning and standards lines has already turned bearish.
These charts demonstrate that the stocks that accounted for the majority of the gains in major stock market averages are now bearish or approaching a bearish pattern. Unless new leadership emerges in the market, the bull market that began in 2009 is likely to end soon.
Clouds can help traders spot buy and sell signals. But, all tools will require time and commitment to use. Many individuals discover that they are not able to complete the required amount of research because that can take an extended amount of time and they have other personal and professional commitments competing for their time.
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