October hasn't been a very good month for Japan's Nikkei 225 Average. And for those invested in the Nikkei, October has been nothing short of apocalyptic. A quick run through of the stats is enough to send investors screaming for cover.
As of close of Tokyo trade Monday, 27 October:
- Down for the fourth straight trading day
- Down 2143.35 points, or 23.03 percent, over the last four trading days.
- Lowest closing value since pricing history was made available by Thomson Reuters (April 15, 1983)
- Largest four-day point decline since October 10
- Largest four-day percentage decline since pricing history was made available by Thomson Reuters (April 15, 1983)
- Off 57.10 percent from 52 weeks ago.
- Month-to-date, it is down 36.39 percent.
- Year-to-date, it is down 53.21 percent.
Will the nightmare end? Is the bottom in sight? Is there an answer in the charts?
Chart analysis uses past activity on investor/trader behavior to develop forward projections based on the probability of repeated behaviors. It sounds very academic, but it has essential applications in today’s markets.
When we look at the Nasdaq, we set support levels between 1,200 and 1,300 because this is where the Nasdaq consolidated in the previous uptrend several years ago. Lower levels at 800 are based on consolidation patterns from earlier periods.
Chart analysis has a problem when markets move up to make new highs. It's called charting blue sky. We use chart patterns, trading bands and other features to project upside targets.
But in the current market situation, we face a unique problem where some markets are hitting new long-term historical lows. This is almost uncharted territory and it is difficult to establish accurate support levels.
The Nikkei near 7,800, is near the historical lows established in 2003 not seen previously for decades. Establishing potential pause points below these levels requires an understanding of the behavior of the Nikkei in a long-term period. We do not see a simple chart a pattern, such as a down sloping triangle, that can be used to create a downside target projection.
The long-term chart shows the Nikkei develops consolidation trading bands around 4,000 point wide. The period 1993 to 1998 was broadly defined by a 4,000 point range with 18,000 acting as the middle level. There were overshoots on the then down side and the upside but rally activity was generally contained within these ranges.
The 1990 collapse found a consolidation pattern between 1991 and 1992 that spanned a 4,000 point range. The 2004 to 2005 activity was largely confined within a 2,000 point range. This is a consistent broad behavioral pattern and it suggests that this may prevail in the current market decline.
Although the 12,000 level is often cited as a key technical level on the Nikkei, the long-term chart shows this falls within the middle of a 4,000 trading range between 10,000 and 14,000. The fall below 10,000 suggests an immediate downside target near the 6,000 level.
The key feature traders look for in defining bottoms in market falls is a rebound, retreat and rebound pattern where these second rebound starts from the same level as the first rebound. This pattern does not develop over a few days.
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The rebounds must develop into 3 to 10 day subtrends in their own right. It's the test and retest of these developing support levels that provides the first signal of consolidation. The best outcome is for a development of this pattern near the 7,800 level.
The chances of this are slim based on 7,800 acting as a previous pivot point low for the rebound in 2003. A failure of support at these levels turns attention to a rebound consolidation developing near the 6,000 level.
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.
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