Nikkei 225: Final bull charge seen

THE Nikkei 225 index has made a significant recovery since the 1990s. The index for the Tokyo Stock Exchange broke new high in mid-2012 after a prolonged period of range-bound trading.

The bullish momentum in 2013 was marked by the success of Abenomics, which sought to bring about a revival of the Japanese economy after a period of stagnation between 1990 and 2010. The index showed no sign of slowing down and broke the 20,000-mark in June 2015.

Based on the Elliott wave theory, the five waves of the Primary wave have been completed. Looking back at the Primary wave movements, wave 2 was a period of ranging trade movements. Wave 3 began when the index price broke the highest price of wave 1, accentuated by the golden cross (50 SMA cross above the 200 SMA).

The momentum of wave 3 was exceedingly strong as prices moved through the target extension level of 261.8 per cent and broke above the 20,000 mark, which was the first time in decades. After two years of bull run, wave 4 marks the end of the euphoria and prices subsequently entered into corrective mode. The fifth and final wave started after prices rebounded near the 200 SMA at 15,000.00.

Unfortunately, the wave of optimism did not last. Fast forward to 2019, the index has suffered a setback as prices reversed sharply by closing below the 24,000 level, after peaking at 24,445.84. We expect stock prices to stage a final bullish charge to 23,824.70 before a strong reversal pattern forms.

Our Elliott wave analysis points to a potential double three corrective waves. There were three evidences as such:

Technical analysis strongly supports the case of a short-term bullish movement with prices supported above 200 SMA. The recent prices also point to a bullish run as prices close above the 50 SMA.

There was a confirmation of a double bottom with the recent breakout above the resistance at 21,821.86, signalling a price reversal to the upside.

However, do look out for the red zone highlighted in the chart. It is a potential selling zone as there was a gap down on Oct 8, 2018, which coincides with the Fibonacci retracement level of 88.6 per cent. This is an especially strong reversal pattern.

Should prices touch the selling zone after the short-term rally, there would be a reversal to the downside.