We did not call this an update, preferring instead to forget previous errors. This index was down almost 24% at the recent lows measured from the highs of 2015. Our attention was drawn to this index simple because of the Bank of Japan’s recent moves to go for negative interest rates. Monetary stimulus has done very little for this economy other than devalue the yen. Now with one of the worlds highest levels of government borrowing they want to do a little more just to see if this time it might work.

From an EW perspective we have two almost but not yet equal legs down that together could form an a-b-c correction. That would call for a new high down the road. Alternatively it could become a series of 1-2s or something very bearish. Of course you always, no matter what get to a point where you have these two possibilities while you wait for the pattern to develop further. The only thing we do know for sure is that a C leg MUST subdivide in a 5-wave sequence so this is not done yet. We are presently in a 4th wave of something. This is an amber light in our trading approach, leave it alone.

By the way, the DOW is not in a significantly different position.

We did not expect such a large rebound in the Nikkei as we had the past half year. In fact we expected the index to make a new low somewhere in the neighbourhood of, say, 5000. The Japanese have undergone a renaissance in mercantilism, monetary expansion and deficit financing all on a scale previously unheard of. Will it all work, or will it work at all? A few inconvenient facts makes one wonder where this will all go. At 240% of GDP government borrowings are on a scale not seen anywhere else. Should rates approach 2.5/3% on government bonds the entire intake by the government will be needed for interest expense. The population is starting to shrink at an alarming rate which is only expected to accelerate. Competition is pretty fierce and there is not much love lost between Japan and some neighbours. It all begs the question how far they can take this before it blows up. We will see.

The Japanese market has been one of a few, if not the only one, to go up the last few months while everything else was going down. This fits perfectly with the earlier view that the Nikkei 225 may be making an expanding triangle. Here is an update;

Both charts are from Yahoo finance, one of a few charting sources that carry this index. Frequently the A and C waves travel the same distance. On an arithmetic scale that would put the Nikkei below zero, so that is not possible. On a log-scale the distance travelled was already equal at the most recent low. But the pattern was not yet complete. Once this latest rise , an e-wave in a triangle , is complete the last part of the 5th wave should take the index to, say 4000 where again the two down parts are equal. All this is going to be spectacularly wrong if we trade substantially through 11000 or so.

An alternative count would be a triple zig-zag. The outcome would be just as bad. See also Ford for another example.