Update on NKD: May 29, 2013

While the Nikkei hasn’t officially been on our hit list, it’s certainly been fascinating to watch.  Today, it earned its very own page on pebblewriter.com.

Late last night (early this morning?) I updated the USDJPY [HERE] which was at a critical point in its own rally to the moon.  It recently broke down through the midline of a channel dating back to August 2012 and was backtesting it within the confines of a rising wedge (dashed, yellow below.)

This afternoon, that wedge broke down and the pair is heading for the bottom of that channel at 99.56 sometime in the next several sessions.

I suspect the channel will hold.  But, if it doesn’t… well, let’s just say it’s a very long way down.

If that channel looks familiar, it might be the similarity to the channel that has guided the Nikkei 225 to a stunning 88% gain over the past 7 1/2 months.

Funny thing about that channel… it just broke down.

It’s entirely possible that the dip will disappear — nothing more than an intra-day burp that quickly fades from memory.  But, a failure to retake the channel will more likely result in a slide to 13,112 or even 12,343 to fulfill the obvious Inverted Cup & Handle Pattern.

When channels break down, they usually just morph into something less aggressively sloped.  This one, like the USDJPY, is ridiculously steep.  A drop to 12,343, for instance, would result in a channel more like the gray one shown below.

What might take NKD that low? First, remember that NKD just tagged the .786 Fibonacci retracement of the crash from 18,365 to 6,990 between 2007 and 2009 (the Dow and S&P 500 have retraced more than 100% of their declines.)  So, this was no garden variety reversal.

Taking a look at the smaller harmonic patterns, the little red 1.618 extension lines up with a previous bottom and the .707 of the large white pattern.  So, 13,112 would likely be an interim low.

The secondary target of 12,343 (the white .886 Fib) intersects with the grey channel bottom next Tuesday, May 4, which is consistent with our general equity forecast.  In a highly-correlated, cross-collateralized, quantitatively amped world, we can expect such a move to spill over into other equity markets.

The key will be closing below the purple channel bottom, currently around 13,857.

Stay tuned.

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