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Nikkei: A Second Drop This Week Appears Likely


While the Nikkei 225 continues to maintain above the April low, the resultant bounce looks convincingly corrective.

While the Nikkei 225 (INDEXNIKKEI:NI225) continues to maintain above the April low (despite last week's breakdown of trend-line support), the resultant bounce so far looks convincingly corrective -- likely setting up another drop this week.

However, based on Elliott Wave analysis, while a series of 1s and 2s that can take price significantly lower is still a valid possibility, I'm more inclined to believe that the next low will complete wave 5 of an ending diagonal C-wave, which is reflected by the red count on my chart (see link below). That scenario would place price in a b-wave of the fifth wave in the ending diagonal. Resistance above remains 14295-14365 for the b-wave to complete, and the ideal target for the c-wave is roughly 13600, although targets for diagonal structures tend to be a little less precise. Otherwise, if price can manage to rally strongly above that resistance region, a potential i-ii of an ending diagonal to the upside in the blue count is still valid, which would allow price to rally back to test the March high before rolling over. Until then, though, the red count has the clear advantage.

Looking at the European markets, unlike the DAX Performance Index (INDEXDB:DAX), the SPDR Euro Stoxx 50 ETF (NYSEARCA:FEZ) broke above trend-line resistance last week, making it more likely that the b-wave in the red count is complete already. That would suggest that price is already in the c-wave, targeting between 3220-3255. Otherwise, it's possible to count the red b-wave as a running triangle to fit with the potential triangle in the DAX that would allow for a small correction this week that holds above last week's low.

However, if price were to break below last week's low from here, then the bearish blue count must be considered more seriously. With price still below the April high, the potential i-ii to the downside remains valid, but at this point I'd strongly consider a truncated top in the red count as an alternative if price were to start breaking down strongly.

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 US 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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