What the Ichimoku Kinko Hyo suggests about the oil price outlook

The Ichimoku Kinko Hyo indicator, has a primary focus on market trend. Adding the indicator to the following charts we assess the current trend standpoint, and identify both bullish and bearish criteria to help traders assess a bias towards trades on these commodity prices. It should be noted that for this exercise we are not using the ‘Trigger’ and ‘Base’ lines and in turn they have been removed from the charts below.

For a confirmed uptrend the Ichimoku indicator has three primary requirements in terms of trend. These requirements are as follows:

1. Price to be trading above the cloud (shaded area on chart)

2. Cloud to be green (in our current default setting)

3. Lagging line / Chikou Span (black line) to be trading above the price

For a confirmed downtrend the requirements are as follows:

1. Price to be trading below the cloud (shaded area on chart)

2. Cloud to be red (in our current default setting)

3. Lagging line / Chikou Span (black line) to be trading below the price

West Texas Intermediate (WTI) oil

The above chart of WTI while having traded in a strong uptrend for most of the year, is seeing some ambiguous trend signals presented by the Ichimoku indicator at present.

Marked with the black arrow, we see that the cloud has moved from green to red. The lagging line (Chikou Span in Japanese) is currently trading below the price. This meets two of the three requirements for a bear trend.

The third requirement for a bear trend (the price trading below the cloud) has not yet manifested. Instead we currently see the price reversing off the cloud as it acts as support.

The ambiguity of the signals presented by the Ichimoku Kinko Hyo at present assumes a consolidatory (non-directional) price environment. Trend followers using Ichimoku studies will be waiting for the following bull or bear scenarios to manifest before choosing a long or short bias to trades on the commodity.

Bull and bear setup criteria

For a bear case scenario and short bias to trades, we are looking for the price to break below the lower support of the cloud.

For a bull case scenario and long bias to trade, we are looking for the cloud to turn green once more and the lagging line to move back above the price. A cross of the lagging line above the price could also suggest the actual entry trigger for a long trade.

However while neither the up or down trends have full confirmation, we assume a consolidatory price environment for now.

Brent Crude oil

As can be expected, the price of Brent Crude trades in a similar fashion to that of its asset class peer WTI i.e. The Ichimoku Kinko Hyo assumes a short to medium term consolidation. Traders using the study would in turn be waiting for the same bullish and bearish criteria to manifest before committing to a long or short bias to trades on the commodity.

That is:

For a bear case scenario and short bias to trades, we are looking for the price to break below the lower support of the cloud.

For a bull case scenario and long bias to trade, we are looking for the cloud to turn green once more and the lagging line to move back above the price. A cross of the lagging line above the price could also suggest the actual entry trigger for a long trade.