Similarly to other benchmark stock market indices such as the Dow Jones Industrial Average, the S&P 500 or the German DAX, the Japanese Nikkei 225 has been a wonder to behold since its 2009 bottom. During the past nine years, Nikkei 225 has returned over 200%, 205.4% to be exact, climbing from just under 7000 to over 21 400 as of this week. Those, who were smart enough to buy in late-2008 and early-2009 must be very pleased with their results. Unfortunately, no trend lasts forever and with “The Everything Bubble” still inflating, maybe it is time to see if the Nikkei 225 is not a little too overextended, as well. The Elliott Wave Principle will help us with the task.
Just like the DAX, the Nikkei 225 has drawn an almost complete five-wave impulse to the north from the 2008-2009 lows, labeled I-II-III-IV-V. Wave I is a leading diagonal, followed by a (w)-(x)-(y) double zig-zag correction in wave II. Wave III’s impulsive structure is also clearly visible. Then there is another double zig-zag in wave IV, whose bottom near 14860 gave the start of wave V, which took the index up to 21 400 so far and is still in progress.
All that being said, the problem is that according to the theory, once the five-wave rally is complete, a major three-wave correction in the opposite direction should occur. In addition, the relative strength index shows a strong bearish divergence dating back to wave 3 of (3) of III.
This is not a selling recommendation. The Nikkei 225 looks poised to reach 23 000 and maybe even 24 000. However, chances are most of the uptrend is behind us already. The bulls seem to be running out of time and the risk involved with joining them now is simply not worth it.