Is the Nikkei About To Go Into A Bear Market?

November 17, 2014

This probably seems like an outrageous question to ask considering the Nikkei’s reaction to the latest round of stimulus from the Bank of Japan shown well by the parabolic pop in the daily chart below.

NikkeiAfter all, the Nikkei shot up 21% between mid-October and mid-November of this year.

Not bad for a few weeks of trading action and trillions of promised yen. It could even be enough to smooth out investor reaction to the news that Japan fell into a recession in the third quarter with this note created ahead of that announcement.

But we have seen a different version of this parabolic picture before as shown by the longer-term daily chart of the Nikkei on the following page.

That particular parabolic spike is not captured in its entirety here, we’ll get there soon, but what is offered below is the Nikkei’s reaction to the actual start of Abenomics and the volatile trading range to follow.

In short, the Nikkei has whipsawed between about 12500 and its recent high of 17520 for more a year and a half under the sway of Abenomics.

From a technical perspective, there is something potentially bullish about this range or the higher lows and higher highs and something that suggests the buyers are in control.

But a look at the long-term weekly chart of the Nikkei yields a different picture. Here we see more than 25 years of bearish lower highs and lower lows in what is clearly one of the more volatile global equity indices.

It is in this chart, too, where it is possible to see the truly stunning magnitude of the pre-Abenomics parabolic uptrend as shown by the last spike up to right.

Yes, this is true. Much of the Nikkei’s gains over the last two year were on the anticipation of aggressive stimulus out of Japan.

Interestingly and as a way of underscoring just how volatile the Nikkei has been, it climbed more than 80% in 6 months between November 2012 and May 2013 before dropping into a brief bear market in just weeks that spring. This is just a glimpse of the implied volatility being stuffed into the system by the global central banks with a more complete view via the currency markets offered in the complete Peak Prospector.

Considering that volatility breeds volatility, it should not come as a surprise, then, that this long-term chart of the Nikkei makes a very compelling case for the likelihood of a reversal right back down. Such a potential decline would not be simply about giving back the outsized gains of the last month by the slightly more than 100% Abenomics move up.

Probably the best reason to think the Nikkei will reverse back down into a multi-decade range is the index’s clearly breached parabolic uptrend. These sorts of breaches always result in some sort of a correction back down – think gold, silver or Apple – and the Nikkei is unlikely to defy the laws of physics despite the best intentions of the BOJ.

Nearly as compelling and proof really of the previous statement is seeing what happened after the previous parabolic uptrend breaches in the Nikkei itself. Each produced a period of sideways topping ahead of a fairly serious correction back down to the bottom of one or both of the two ranges outlined.

Perhaps this time will be different, but probably not and it is for this reason that it may make sense to consider whether the Nikkei is about to go into a bear market.

As always, thank you for taking the time to read this week’s piece.


Courtesy of


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