Two weeks ago we looked at the Nikkei and suggested that the Nikkei could develop a strong rebound from support. This has not happened so this week we want to take another look at the analysis, and also develop new analysis.
Fast rises are inevitably followed by retracements. The retracement is a signal to protect profits when the market has developed end-of-trend behavior. This is often shown with chart patterns such as a rounding top, a head and shoulder pattern, or a significant drop below an established trend line.
In June one of these features – a significant drop below the established trend line – developed. This immediately changed the analytical environment.
Our analysis concentrates on identifying the conditions that will signal when a high probability development is occurring. On the Nikkei chart the critical line was the trend line because this acted as a support level.
(Read More: An End in Sight for Japan's Turbulent Markets?)
The analysis framework has two parts. The first part is the potential future development if the Nikkei remained above the trend line and used this as a support level. The second part was the potential future development if the Nikkei fell below the trend line.