Nikkei Bull Run Over, Looking at 11,500 Now: Chart

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Japanese Prime Minister Shinzo Abe

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.

(Read More: Japan Fires 'Third Arrow,' but Will It Hit Bull's Eye?)

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.

We noted that the Nikkei would need to close convincingly below 14,348 to signal the retracement has become a trend change. The support features around this area were strong. They included the trend line which was also near to the lower edge of the long tern group of moving averages in the Guppy Multiple Moving Average indicator.

The failure of these two support features was very significant and immediately told investors and traders the market had changed from bullish to bearish. This is the key importance of technical analysis. It allows investors to quickly know when to change from bullish to bearish. Technical analysis identifies exactly when the balance of probabilities has changed.

How far can the Nikkei fall and what will a new trend change look like? These are the two most important questions. The Nikkei has a well developed support level between 12,000 and 12,500. This area acted as a small resistance level in March 2013, but it has played an important support and resistance role in 2002, 2004 and 2008. This increases the probability the Nikkei will develop a rebound from this area. Failure to hold at 12,000 to 12,500 has the next strong support level near 11,500.

What will a new trend change look like? The current downtrend is difficult to define with a trend line. This suggests that any new uptrend will develop after a period of consolidation, or sideways movement, around the value of the support level. Any rebound will encounter resistance. This new resistance level is defined by the value of the long term uptrend line. This is currently near 13,700.

The collapse in the Nikkei was not signaled by an end of trend chart pattern. It was signaled by a move below the up trend line.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at [e-mail]. We welcome all questions, comments and requests.

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