Interpretation
Now we come to the essence of the Ichimoku technique. The first thing to notice is the way the price responds to the cloud. Frequently prices will turn when they hit the edge of the cloud, or sometimes they will run along the edge. In the chart above we can see some interaction in various places. On the left in June the price ran up the cloud border, and it came down to touch again in July. In both cases there was a little penetration, and cloud touches aren’t always precise.
Over in December the price found some support before dropping through the cloud, and the subsequent failed rally found it impossible to penetrate the underside of the cloud. March showed a similar trait, but eventually pushed through, although running along the cloud edge before pushing higher. Prices can approach and interact with the inside or outside edges of the cloud.
State of the Market
Whether the price is above or below the cloud gives you an instant picture of the state of the market. If the price is above the cloud, then you are usually in an uptrend, and below the cloud means a downtrend. Most frequently, the crossing barrier is often the Leading Span B line, which is shown thicker above, although you can find support or resistance in other areas of the cloud. The left third of the chart above is an uptrend, then there was some sideways movement, where we know cloud signals are not reliable, but by September the uptrend was marked again. In December the price drops below the cloud and stays well below as the downtrend develops.
If the price is in the cloud then there could be a transition from one state to the other, and you have to watch closely. The price may cross the cloud and change the trend, or the cloud may provide support or resistance. Generally, if a price enters the cloud from the top then the market is still bullish, but at risk of a reversal. This will normally also be a bullish blue cloud. If the price comes up from below, normally into a purple cloud, you can still consider the market bearish until there are signs to the contrary.
What of the cloud itself? It usually becomes thickest when the prices are accelerating in the trend, because Leading Span A is moving quickly away from B. If it becomes thinner, it means that the trend might change and prices cross the cloud.
