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Is the Nikkei Bottoming?


Despite dropping lower, the index is still showing strength.

Despite dropping lower toward the target last session, the Nikkei 225 (INDEXNIKKEI:NI225) is still showing strength.  From an Elliott Wave perspective, it's more strength than I ideally wanted to see in order to maintain my expectation for a new swing low below the one made in April to complete wave 5 in this ending diagonal. In fact, the RSI has recently provided us with a bottoming signal, and the pronounced positive divergence is hard to ignore.

Therefore, I wouldn't push your luck trying to squeeze the last bit of potential downside out of shorts, and put stops no higher than breakeven at this point. Immediate resistance above sits at 14,160, followed by the downtrend line from the April high. Ideally, price turns down one more time from either of these levels and targets the blue box (see charts). Otherwise, a break above will have me searching for more immediately bullish alternatives (which may be a truncated low). 

Looking at the European markets, the (i)-(ii) down in the Euro STOXX 50 remains a strong potential here with resistance between 3165 - 3175. Aggressive traders may attempt a short there with a stop above last week's high. Assuming resistance holds and turns price lower, the May and April lows should be tested next, but exact targets can be determined using fib pinball once wave (ii) is in place.

Otherwise, a break above resistance and then last week's high puts the 3225 back on the table to either complete wave c of iii in the blue count, or alternatively wave v in the red count. 

See charts illustrating the wave counts on the Nikkei and Stoxx here.

Garrett Patten is a technical analyst and chief educator for, a live trading room featuring Elliott Wave analysis on market indices and stocks.  Mr. Patten's focus is primarily on U.S. and international equity indices, and demonstrating the capabilities of unconventional technical analysis.  His articles appear on sites including MarketWatch and SeekingAlpha.

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