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Elliott Wave Analysis: Nikkei Set Up for Retracement

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The ideal target above sits around 16,600, and once topped, we should see a retrace of at least December 2013's gains.

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The Nikkei (INDEXNIKKEI:NI225) has gapped below the channel support, which, according to Elliott Wave Theory, signals that wave iv of 5 has begun. Support for this pullback is between 15,915 – 15,765, which, if reached in a corrective 3 waves, should lead to one final high to complete this impulse off the October 2013 low.

The ideal target above sits around 16,600, and once topped, we should see a retrace of at least December 2013's gains. This forecast aligns well with trend line resistance approaching on the MACD that has held negative divergence since the May 2013 high. How price reacts when it reaches support below should determine a path for the Nikkei in the first half of 2014.

The region of interest below is between 15,400 – 15,000. This 400-point range represents an important inflection point for the price pattern that I am watching in the Nikkei. There is a potential bullish outcome if this support region holds, which could delay the larger expected pullback until the second half of 2014, and target above 17,000 next. This scenario is shown on m y chart by the Elliott Wave count labeled in red.

However, if the 15,400 – 15,000 support region does not hold, it should lead to a much larger decline to kick off the year. This scenario is shown on my chart by the Elliott Wave count labeled in blue and should eventually take price back to test the 2013 June low. This low represents another important inflection point, which will likely determine if price will turn back up to new highs into the end of the year, or extend further to the downside in a major decline.

As for the Euro STOXX 50 (NYSEARCA:FEZ), similar to the DAX (INDEXDB:DAX) support for wave 4 in the STOXX is holding so far, but the nature in which price declined into that region was a bit more swift and steep than ideal. The decline counts best as 3 waves, but the technical damage done is not insignificant.

I think, however, that wave 5 in the red count is starting which should take price back to the December 2013 high, or to 3155. Resistance before those levels though is between 3085 – 3095, which should contain price if we are indeed dealing with a larger pullback under the blue count or alt red count. If price does turn back down from there, the next support bellow is between 3020 – 2995.

If that region does not hold, the December 2013 low should be tested next in what is likely to be the blue count playing out.

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

Garrett Patten is a technical analyst and chief educator for ElliottWaveTrader.net, 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.

Read more:

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No positions in stocks mentioned.
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