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Elliott Wave Analysis: Nikkei Set Up for New Highs

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Watch for a breakout this week in the Nikkei and a bounce in the Euro STOXX.

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Elliott Wave analysis calls for a setup for new highs in the Nikkei (INDEXNIKKEI:NI225) and a bounce in the Euro STOXX.

After the expected pullback last week, the Nikkei 225 Futures has held support for the bullish blue count so far and is setup for a break to new highs this week. However, price is not out of the woods yet, and must make a clean break above the minor down trendline to confirm wave (iii) of iii to 16,000 in the blue count.

If instead price heads further down at the start of this week, breaking below the uptrend line currently supporting price, then 15,000 – 14,815 in wave C of the red count to complete a larger fourth wave. Therefore, this tight triangle that has formed over the past two weeks should provide us with the answer of whether price is already in wave 5 under the blue count, or needs one more swing down to complete a larger fourth wave in the red count.
A break either way should signal direction, but it must be a clean break -- beware of a spike and reversal, which can happen with triangles.

As for the Euro STOXX 50, resistance in the STOXX also held last week, but slightly lower than I expected during that bounce. This new low that followed has been made on clear positive divergence so far, which means that we have to be cautious of the more bullish red count, despite my preference for further downside under the blue count.

Therefore, this next bounce will be important, which will either start from here or slightly lower around 2,890. If only corrective, and unable to break back above 2,950, then price is likely setting up a strong decline in wave iii of 3/C under the blue count to at least 2,835. This would likely confirm a change in trend and a larger top in place, making new highs unlikely for a while.

Otherwise, if price can stage a strong rally after this low, breaking above 2,950 and then 3,000, new highs under the red count become much more likely.

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.

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No positions in stocks mentioned.
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