|The Nikkei fired a warning shot at bulls with a trendline break, and the recovery rally is now running into a triple resistance threat.|
|As the weekly chart shows, the Nikkei staged an impressive advance from April 2003 to April 2004. Along the way, the index broke neckline resistance (green arrow) of an inverse head-and-shoulders pattern. Broken neckline resistance often turns into support, but failed to hold with the steep decline in late April/early May. This decline broke below the trendline extending up from April 2003. Moreover, this broken trendline extension is now providing resistance around 11870 (red arrow).|
|Figure 1: Weekly chart for the Nikkei|
|Graphic provided by: MetaStock.|
|The sharp decline from 12196 to 10499 was a shock to the system that created an oversold condition. Notice that the 14-day RSI moved below 30 (oversold) to confirm. The subsequent advance relieved that oversold condition and is now running into resistance confirmed by three items (hence the triple resistance threat). Including the April 2003 trendline extension, resistance also stems from a 62% retracement of the prior decline and broken support at 1162.|
Figure 2: Daily chart for the Nikkei.
In addition to the resistance threats, the pattern looks like a rising wedge (magenta trendlines), which is typical for a corrective advance. The Nikkei has already challenged the lower trendline, but found support around 11310 (blue arrow). As long as this level holds, the bulls have a fighting chance. However, a more below 11310 would signal a continuation lower and project weakness to around 10000.
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