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What the Ichimoku Kinko Hyo suggests for the oil price trend

In this article we look at what the Ichimoku Kinko Hyo indicator currently suggests about the prices and outlook for West Texas Intermediate (WTI) and Brent crude oil.

Source: Bloomberg

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 commpdity 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

Source: IG Charts

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 Kink 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

Source: IG Charts

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.

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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