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Technical Analysis: Nikkei Wave Counts Point to Pullback


Elliott Wave analysis tells us to expect a pullback in the Nikkei 225 futures before the next move higher.

Elliott Wave analysis tells us to expect a pullback in the Nikkei 225 (INDEXNIKKEI:NI225) futures before the next move higher.

After last week's clean break out of the multimonth triangle, the Nikkei has been cooperating well with our expectations. Since tagging the 1.236 extension of wave 1, price pulled back to just below the 1.00 extension at 15100, and now is sitting right at the 1.382 extension at 15,520. According to the last weekend update, this is the path that the slightly more bullish blue count was suggested to take, where wave iii of 3 would top at the 1.382 extension.

Under this count, price should now pull back to the 1.00 extension at 15,100 again to complete wave iv of 3, and the turn back up to target the 1.764 extension at 15935 to complete wave v of 3. However, the price pattern off the November 18 low at the 1.00 extension does not quite seem complete yet, suggesting that the next Fibonacci level higher at 15,775 may be targeted early this week, and this minor trend channel that has formed off that low will hold.

If that does happen, then it is suggestive of the red count, which simply places price a little bit further along in the pattern, with this next high completing wave v of 3. After wave v of 3 completes in the red count, we should see a reasonably lengthy corrective consolidation in red wave 4, which should slowly make its way back to the 1.00 extension at 15100 in 3 waves, before setting up the final push to new yearly highs.

As for the Euro STOXX 50, before the decline early last week, the STOXX has a similar potential ending diagonal as the DAX (INDEXDB:DAX), except price fell substantially out of the minor trend channel that should have held for wave iv in that ED. Therefore, although the ED pattern, shown in blue, is still technically possible since it did not invalidate, the more likely outcome at this point appears to be the red count, which places price currently in a wave 4 correction targeting 2985 ideally.

Wave 4 of the red count looks like it is tracing out as a complex correction, in which price should be in the middle of a y-wave. Since y-waves are three wave events, this current bounce should be a minor b-wave, which can still reach a little bit higher to roughly 3070, but should turn back down soon in a minor c-wave towards the 2895 target to complete.

See charts illustrating 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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