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WEDGE FORMATIONS


Nikkei Breaking Down

11/20/06 08:54:02 AM
by Arthur Hill

The Nikkei 225 is breaking down on a number of fronts, and this points to a continuation of the April–June decline.

Security:   $NIKK
Position:   Sell

On the price chart (Figure 1), the current advance in the Nikkei formed a rising wedge and the index broke the lower trendline over the past two weeks. The April–June decline set the bearish tone and the rising wedge is typical for countertrend rallies. Note that the advance met resistance near the May gap and support break. The recent break below the lower wedge signals a continuation of the prior decline and the downside target is below the June low.

FIGURE 1: NIKKEI. The current advance formed a rising wedge and the index broke the lower trendline over the past two weeks.
Graphic provided by: TC2000.com.
Graphic provided by: Telechart 2007.
 
The index also broke back below the 50-day moving average and 200-day moving average. The 50-day moving average has a good history with the Nikkei. The index broke the 50-day with a gap down in May and this moving average turned into resistance in early July. The index then broke above the 50-day in late July and this moving average turned into support in late September. The current break is bearish, and I would look for this moving average to offer resistance in the over the next one to two months.

In addition to the breakdowns on the price chart, the Nikkei shows relative weakness over the last six months. The price relative compares the Nikkei to the Standard & Poor's 500. The indicator broke to new lows in June and the recovery off the June lows was feeble, to say the least. While the Nikkei moved to new reaction highs in October, the price relative formed a lower high and the Nikkei was not keeping pace with the S&P 500. The price relative recently broke to new lows and the laggard on the way up could become the leader on the way down.



Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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