|It's been a long bear trend for the Japanese markets. This long-term monthly chart (Figure 1) shows evidence of an important turnaround, which may be the start of a substantial economic recovery for this Asian powerhouse.|
|A small reverse head & shoulders pattern can be seen at the bottom of Figure 1. A reverse head & shoulders is simply a mirror image of the classic topping pattern. The left shoulder and head is very clear, as is the neckline. The right shoulder is not striking, but it's there, nevertheless. The upside target for such a pattern has already been realized. The distance from the head to the neckline (~4000 points) as applied to a move above the neckline is roughly 16,000. Traders who spotted this pattern early on would already have profited.|
|FIGURE 1: NIKKEI, MONTHLY. This chart suggests an important reversal in the Japanese market.|
|Graphic provided by: StockCharts.com.|
|What is more significant on this chart is that a 16-year trendline has been broken to the upside. Ironically, this occurred at the same time the head & shoulders neckline was broken, giving more significance to the move. Now that two possible trading targets have been reached, the pattern fulfillment target and the overhead 200-period moving average, a pause here would be no surprise. Once this gain is consolidated, the next upside target is indicated at the 10-year trendline at 18,000. Continuing strength above the 200-day exponential moving average (EMA) could lead to large future gains as other traders decide a true turnaround is in the making.|
|Several indicators are worth taking into consideration. At the top of the chart, the average directional movement index (ADX) could not be more positive. It is enjoying a strong upslope coming off a bottom, and it is above the 20-25 threshold at a current 29. Below the chart, the moving average convergence/divergence (MACD) shows a strong move above the zero line and also reveals a large positive divergence to price action. The relative strength index (RSI) shows a small, more recent positive divergence (also seen with the MACD) between the left shoulder and the head of the formation.|
A cautionary note with the overbought parameters on the RSI and stochastics oscillator: this points to a possibility of a downturn, but until the stochastics dips below 80, this stay can be extended.
|When a daily chart suggests a reversal, it is a good sign, but when a weekly chart suggests a reversal, it is more promising. When a monthly chart points toward a reversal, a much bigger move may be in the making. This would be a welcome turn of events for the Japanese marketplace. What goes down must eventually go back up. Lately in North America, the reverse case has been bandied about. That makes me wonder if "big money" will bank North American profits and take part in this potential Asian turnaround.|
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