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Nikkei Bears Only Getting Warmed Up

The last time we wrote about the Japanese Nikkei 225 index (NKY) was October 18th, 2017. While the price was hovering around 21 360, the weekly chart of the benchmark allowed us to recognize a worrisome Elliott Wave pattern, suggesting the bulls should be able “to reach 23 000 or maybe even 24 000“, but a major three-wave decline should then follow. Take a look at the chart below to refresh you memory.

nikkei 225 elliott wave analysis

The pattern in question is called an impulse and the weekly chart of Nikkei 225 revealed that it has been developing since the March 2009 bottom at just under 7000. As visible, we thought wave V of the sequence was still in progress, but the bulls were definitely “Overstaying Their Welcome”. So instead of joining them, it made sense to simply stay aside and prepare for a bearish reversal once they run out of steam. A bearish divergence between the price and the Relative Strength Index further reinforced the negative outlook. Four and a half months later, here is an updated chart of the Nikkei 225.

nikkei 225 elliott wave analysis update

The bulls could only defy gravity until they climbed to 24 129 on January 23rd, 2018, where wave (5) of V appears to have ended. The following 3100-point selloff breached the 21 000 mark, dragging the Nikkei 225 to as low as 20 937 by March 5th. The bad news is we do not think the bloodbath is over yet. In fact, we believe the bears are only getting warmed up.

If this count is correct, the post-2009 bull market is finally over and a major three-wave decline to the support area of wave IV should be expected from now on. This means the Nikkei 225 could lose another 6000 points from current levels. The MACD indicator seems to be in overbought territory, as well, and the bearish divergence we already mentioned still persists. In our opinion, it is too early to buy this dip.

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