Monday's Asian market rout on news of the Bear Stearns fire sale and the Fed's 25 basis point rate cut, hit Japan's Nikkei 225 Average hard.
The Nikkei closed, down 454.09 points, or 3.7 percent, to 11787.51. The index was down for the third straight trading session. And it's lost 1073.62 points, or 8.3 percent, over the past three trading days.
Monday was also the largest three-day point and percentage decline since January 22, the largest one-day point and percentage decline since March 3 and the Nikkei's lowest closing level since August 8, 2005.
Month-to-date, the Nikkei is down 13.3 percent. So far this year, it's down 23 percent.
When the Nikkei 225 Average falls, it tumbles. The weekly chart shows rapid changes in trending activity. When the change occurs it develops into an easily defined trend. The advantage in this market is the ease of trend definition. The disadvantage is the speed of new trend development. This makes it easy to be quickly caught on the wrong side of the trend.
The first significant feature on the weekly Nikkei 225 is the clear downtrend starting in October 2007. We use this starting point because the line position is defined by the two highs in December 2007 and March 2008. The trend line touches three reaction points. The same line on the daily chart acts as a reaction point of 5 occasions. A trend line starting with the July 2007 high of 18,269 only touches a single additional point and this makes the trend line less useful for analysis purposes. This two-point touch is also seen on the daily chart.
The trend line provides a resistance cap. The value of this resistance falls with each new week. The current resistance cap is 13,400 but to get there the Nikkei has to overcome another significant chart feature.
Between April 2004 and August 2005 the Nikkei traded in a prolonged sideways consolidation band. There were sharp and well defined trends within the band, but the general movement was for consolidation. The upper level of this band is located near 12,200. This upper edge is also a small band rather than a distinct level. The lower level of this is near 11,950. This area has the potential to provide a support level for the current downtrend.
The lower level of this long term trading band is more exactly defined near 10,700. This support level was tested many times between April 2004 and August 2005. There is a high probability it will again form the floor of a support consolidation level between 11,950 and 12,200.
The Guppy Multiple Moving Average (GMMA) indicator captures the relationship between short term traders and long term investors. This relationship gave clear warning that the August to October 2007 index rise was a rally rather than a trend change.
Currently the index is consistently clustered below the short-term group of GMMA averages. This is very bearish. Index activity must be able to rally and penetrate into and above the value of the short-term group of averages as a pre-condition to any change in trend. The upper edge of the short term GMMA group is near to the value of the downtrend line. This combination of features suggest there is a low probability of a significant rally with the strength to move above 13,400.
Combine these analysis methods and it suggests there is a low probability of a trend change developing with a rebound from the 12,000 to 12,200 level. Any rises is capped by the trend line, and by the well separated short-term GMMA. There is a higher probability the market will continue to fall and tests the 10,700 support level.
A consolidation in this area will develop a series of successively higher rallies that are the precursor to a significant trend change. The character of the Nikkei 225 Average suggests that the trend change can develop quickly and clearly. The initial rise in a new trend is capped by resistance between 12,000 and 12,200. The value of the long-term GMMA will provide the second resistance level for any new uptrend.
If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests. You can also watch Daryl on CNBC's "Asia Squawk Box", Monday 24 March, starting 6:30 am HK/SIN time.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.