The pattern is confirmed when the index activity following the right shoulder falls below the extended value of the neckline, as happened in January 2016.
The validity of the downside target is enhanced when the projected level is near a historical support level; with the Nikkei, historical support is near 13,900. This was a strong support level that held between October 2013 andl May 2014. There is a high probability it will act as support again. A fall below this level has support near 12,500.
If the neckline position uses the extreme lows of the head and shoulder pattern, the depth of the pattern is 4,211 points. Project this downwards from the new position of the neckline and the downside target is 12,500.
This suggests that the initial target for the Nikkei is 13,900, with the potential to move to 12500. Either way, its clear that the collapse of the Nikkei is far from over. Sure, there will be rally rebounds but these do not invalidate the downside targets. Traders and investors will carefully watch the Nikkei as it approaches these target levels. A sharp rally rebound is possible, but the most probable outcome is the development of a consolidation pattern.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC's Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.
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