A look at the Ichimoku indicator

In my down time this weekend, I've been looking at the Ichimoku cloud indicator.  I won't spend too much time on how it works, as there is an abundance of info on that elsewhere (have a look at stockcharts.com).  I decided it has the potential to be a wonderful adjunct to the wave principle. 

Where Ichimoku seems to shine is in its ability to properly identify when a change in trend has occurred.  Elliotticians are notorious for being "early", and I'm definitely no exception.  Any indicator which helps enforce a little patience and discipline is probably worth its weight in gold.  Of course, you will never be in ahead of a turn using a trend following approach, but perhaps if you avoid several false positives, that doesn't matter.  Or perhaps you take a partial position when the waves are calling for a potential turn, and you wait for confirmation before adding the remainder.  There are plenty of possibilities.

Elliott Wave labeling has been known to be somewhat subjective, but Ichimoku interpretation appears to be quite objective in its application.

It should be sufficient to answer the following questions:

1. Is the signal line (Tenkan) over the base line (Kijun)?  Yes = Bullish, No = Bearish
2. Is the cloud green and rising? Yes = Bullish  ** My chart  is yellow
3. Is the cloud red and falling? Yes = Bearish
4. Is price above, below, or in the cloud? Above = Bullish, Below = Bearish, In = Neutral
5. Is the lagging line (Chikou) above price? Yes = Bullish, No = Bearish

Obviously, some of these signals can be conflicting, so ideally you want them all to reinforce one another or you have to make a judgment call.

Let's take a look at USO with Ichimoku and Elliott Wave side-by-side.

On the right is my proposed Elliott Wave analysis, which I'll try and summarize.  The waves generally provide valuable perspective that you simply cannot get from any indicator.  Price was moving higher from the left side of the chart and dropped sharply.  Not shown is the higher degree formation, which I have as intermediate wave (B) or it could be a (2).  So we should be starting an intermediate degree (C) or (3).  We can't count five completed waves down of minor degree without breaking rules, so we still need minor degree waves 3, 4 and 5.  The same appears to be true at minute degree.  Momentum seems to confirm that minuette wave (iii) is a third wave.  We are completing minuette wave (iv) which appears to be a triangle, further reinforcing the minuette degree count, since triangles only happen in fourth waves.  We need a final wave down to complete minute wave ((iii)). 

Now lets look at the left chart for a fresh perspective.  Once again, prices on the left side of the chart were in a bullish trend.  The signal line (green) was above the base line (red).  Price was above the cloud, which was yellow and rising, and in fact was even above the base line.  Price dropped sharply starting May 3, leading to a bearish signal line crossover by May 6.  By May 11th, price had dropped below the cloud, which is another reinforcing bearish signal.   Additionally, around May 11th, the lagging line at the time was well  below price, which is another bearish signal.  Still, the cloud was yellow and rising at this point so perhaps some benefit of the doubt should go to the bulls.  By June 10th price had been grinding sideways to higher, but failing to significantly penetrate the bottom of the cloud, which was now acting as resistance.  Additionally, the leading cloud had now turned red and was falling.  From there you can see that the cloud has continued to act as resistance, and remained red and falling.
Several objective short opportunities presented themselves along the way: 

1. When price broke out of the cloud to the downside on May 11, generating 3 out of 4 bearish signals.  
2. When price bounced off the cloud resistance for the second time on June 9th
3. When price broke to new lows on June 16th after bouncing off the cloud resistance on June 9th
4. When price bounced off the cloud resistance again on July 26th
5. When a bearish signal cross happened again on August 4th
6. When price bounced off the cloud resistance again on September 15th (last Thursday)

I went short again last week based on intraday Elliott wave interpretation, but had I been following this trading methodology, I may have made the same decision.