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Further Downside Expected in Nikkei


Now the task is determining whether this drop is a corrective wave or something more immediately bearish.

After spiking briefly above the ideal 15,080 resistance to hit the next fib higher at 15,200 last week, the Nikkei 225 Index (INDEXNIKKEI:NI225) has since started to pull back as expected, according to Elliott Wave analysis. Now the task is determining whether this drop is a corrective wave iv in the blue count, which is the more probable scenario, or something more immediately bearish, suggested by the red count.

Ultimately, support between 14,785 and 14,655 should provide us with that answer. If price is going to turn back up toward a new high in wave v of c in the blue count, then price should hold between 14,785 and 14,655 for wave iv. Below that region in an impulsive fashion and the red count becomes much more probable. I am still expecting further downside under either scenario, whether price makes another swing high first in the blue count or not.

Looking at the Euro Stoxx 50 (NYSEARCA:FEZ), the STOXX hit the upper end of the target range for wave (iii) of iii in the blue count last week, and even spiked briefly above 3155, but in what looks like a potential b-wave. However, similar to the DAX (INDEXDB:DAX), the technical picture for the STOXX is not aligning with what a wave (iii) of iii should look like. Therefore, the same ending diagonal potential for wave 5 exists on this chart as well, where the recent high could have completed wave iii as shown by the alt blue count, and price is not in a wave iv retrace.

Regardless of whether the pullback is a wave (iv) or alt wave iv, if bullish, price should hold between 3,105 and 3,075 on this pullback before heading higher. If price breaks below 3,075 in an impulsive fashion, then the red count becomes much more likely, and we can expect a c-wave back down to around the March low.

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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