Two more great wedge trading opportunities

One of today’s most hyped stockmarkets is surely the Japanese Nikkei 225. This index comprises 225 of the highest-rated Japanese companies and achieved notoriety in the 1980s when its value soared in a near-exponential bubble to reach the all-time peak of 40,000 in 1990, at the same time as the Dotcom bubble in the US indexes.

That, too, reflected the over-hyped stories that circulated at the time.

Here is a logarithmic chart of the index over the past 100 years. The huge bull market from about 1950 to the top in 1990 shows as a nearly straight line up on this logarithmic scale.

If this were plotted on the usual arithmetic scale, it would look like an accelerating uptrend and I would need a few sheets of paper placed vertically to contain it!

Nikkei 225 chart

At the current 20,000 level, it has lost one half of its peak value. The decline doesn’t look much on this log scale, but if you are still holding shares bought near the peak (as so many did), you are sitting on a huge inflation-adjusted loss in 25 years. Surely, even for the most die-hard buy-and-hold investor, patience would be wearing a little thin by now. And meanwhile, the Dow this year has just made its all-time high in May and many US shares bought 25 years ago have greatly appreciated.

But what interests me is the short-term picture. Here is the daily chart showing the August swoon:

Nikkei 225 spread betting chart

In September, the market consolidated in a beautiful wedge and made a huge positive-momentum divergence at its low. That was the signal to expect a very sharp snap-back rally if the upper wedge line could be penetrated.

And in October, the market did just that and after a traditional kiss, the strong rally ensued. Naturally, taking a long trade at the kiss was the perfect low-risk play. There was a little hesitation when the market hit the target area at the start of the wedge, but quickly overcame that.

But that is not all. The rally off the September low is forming another wedge on the hourly:

Nikkei 225 spread betting chart

The rally has stalled at the round-number 20,000 level and has made several attempts to push above it – all to no avail. And earlier this month, the market fell heavily through the lower wedge line to indicate a change of trend – and set a target at the start of the wedge in the 19,000 area.

If achieved, a short trade would result in a tasty near 1,000-pip profit and for a swing trader, this is well worth going for.

The relief bounce in an attempted kiss fell way short, which indicated that the decline is likely to be severe (remember, I am writing this on 8 December). A failed kiss is usually a sign of underlying weakness.

If my target is reached, what would the wave picture look like then?

Nikkei 225 spread betting chart

It would help confirm the above scenario. I have a five down off the 20,030 high with an A-B-C counter-trend rally where the C wave has hit the Fibonacci 78% resistance on the nose.

Crude oil

There is a terrific wedge in the monthly chart of crude oil starting in 2009 when the market embarked on its historic bull run to the $115 high in 2011. Since then, the market has been falling in a bear market with very steep falls starting in May last year.

Nikkei 225 spread betting chart

But the topping process over many months has formed a wedge with a striking lower support line which has multiple accurate touch points. This large-scale pattern is a reflection of the immense tension that gradually built up (remember my coiled spring analogy?) until the spring finally broke – and propelled the market in a near-vertical collapse.

The decline paused briefly at the start of the wedge target, but with the global deflationary impulse in full swing, the market is making new lows as I write. This news is being covered almost daily on the front pages – and thereby lies a clue as to the likely medium-term outlook for oil prices.

In terms of the Elliott waves, the waterfall decline cannot be much clearer – we are in the final wave 5 down and when it ends, we shall see a counter-trend rally of some size.

My target has been the $60 area for some time (once wave 5 ends, of course). That is because relief rallies off an impulsive five down are aften contained at the wave 4 extreme – in this case, the $60 region.