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Elliott Wave Analysis & Forecast: Nikkei 225 (JP225) - Monthly Chart

Title Image - Nikkei 225 Elliott Wave Forecast and Analysis - 190115

The Big Picture: A Decades-Long Correction

When we look at the monthly chart for the Nikkei 225, the most striking feature is the massive, almost 30-year-long price movement following the peak near 40,000 in 1990. Under the Elliott Wave principle, this entire period is interpreted as a gigantic "Supercycle" corrective pattern.

Specifically, the structure appears to be a complex, multi-layered correction that unfolded as a Double Three (W-X-Y). This kind of correction shows the market battling through multiple consolidation periods before a true directional move can resume.

  1. The First Leg Down (W): The initial sharp decline from the 1990 peak down to the 2003 low (around 7,056) is counted as the large Wave W. This wave itself was a complex zigzag structure (A-B-C).
  2. The Connecting Wave (X): Following the 2003 low, the market entered a broad, choppy sideways consolidation, labeled Wave X. This connector wave ended near the 2007 peak and served to link the first corrective phase (W) with the second.
  3. The Second Leg Down (Y): From the 2007 peak, the Nikkei completed the second major down-leg, Wave Y, which culminated at a low near 6,995 during the 2008-2009 Global Financial Crisis. The completion of this Wave Y around 2009 seems to have marked the end of the entire decades-long Supercycle correction. This massive structural low is labeled as the Green Wave 2? (or simply the end of the long-term corrective phase).

The Current Focus (As of Jan 2019): A New Bull Market Begins

With the 2009 low structurally identified as the end of the major correction, the market began a new, powerful upward impulse—the start of a fresh bull market. This new primary trend is labeled as Red Wave 1 on the chart.

This Red Wave 1 advance, which lasted nearly ten years (2009 to late 2018), developed into a clean, five-wave impulse sequence:

  1. Blue Wave 1: The initial surge up from 2009.
  2. Blue Wave 2: A clear, deep correction that followed Wave 1.
  3. Blue Wave 3: The strongest, most extended advance, running from roughly 2012 to 2015.
  4. Blue Wave 4: A minor corrective dip that occurred around 2016.
  5. Blue Wave 5: The final leg of the rally, which peaked in late 2018 near 24,600. This peak officially completed the entire Red Wave 1 sequence.

📉 The Forecast: Entering a Corrective Red Wave 2

The key takeaway from the chart's publication date (January 2019) is that the long, powerful Red Wave 1 bull market is over. According to Elliott Wave principles, every impulse move must be followed by a three-wave correction in the opposite direction.

Therefore, the Nikkei 225 is expected to have entered a multi-year, significant correction labeled Red Wave 2.

Characteristics of Red Wave 2:

1. Expected Depth:

Wave 2 corrections often retrace a substantial portion of the preceding Wave 1. Looking at the Fibonacci Retracement tool (drawn from the 2009 low to the 2018 high), the standard corrective targets are:

  1. 50% Retracement: Near the 15,900 level.
  2. 61.8% Retracement (The Golden Ratio): Near the 13,770 level.
  3. 78.6% Retracement: Near the 10,840 level.

2. Target Area

The chart specifically highlights a rectangular blue box encompassing the range from approximately 14,000 down to 7,000. While the $13,770 - $15,900 zone is a statistically common target for a deep Wave 2 correction, the chart's ultimate target for the entire Red Wave 2 correction is shown stretching toward the lower part of that blue box, potentially revisiting the 7,000-10,000 area. This deep correction would be necessary to fully shake out the buyers from the decade-long rally.

3. Pattern Formation

2 corrections are usually sharp, deep, and volatile, often unfolding as a zigzag (A-B-C) or a more complex flat correction.

The Crucial Trading Implication:

The message is clear: be bearish and patient. This corrective phase will likely last for several years. For long-term investors, the Red Wave 2 correction presents a phenomenal opportunity to accumulate shares at substantially lower prices.

🚀 The Next Super Impulse: Red Wave 3 Awaits

The most exciting part of this analysis is what comes after the Red Wave 2 correction is complete.

Once the Nikkei finds its long-term low in the projected target zone (likely between 10,000 and 15,000), it will be ready to launch into Red Wave 3.

Red Wave 3 is universally known as the most powerful and profitable wave in the entire Elliott Wave sequence.

  1. Power and Duration: Wave 3s are typically long, strong, and fast, characterized by high volume and broad participation. They often extend far beyond the peak of the preceding Wave 1 (which was near 24,600).
  2. Forecast Potential: A sustained Wave 3 would not just aim for the old 1990 high, but has the potential to push the Nikkei well beyond the 40,000 mark toward new, multi-decade highs.

In summary, the chart (as of January 2019) tells a two-part story: a significant bear market (Wave 2) is underway, which will be followed by a historic bull market (Wave 3).

📝 Analyst's Note & Risk Management

This long-term, structural analysis provides a powerful roadmap. The technical count indicates a prolonged downside move. Prudent long-term investors should set capital aside and wait patiently for the index to enter the forecasted Red Wave 2 target box before deploying new money.

Risk Check: The main invalidation point for this long-term count would be if the market were to make a new high well above the Red Wave 1 peak (24,600) before completing a full, deep correction. If that were to happen, the internal wave count would need a severe re-evaluation.

Quote of the Day

“An investment in knowledge pays the best interest.” — Benjamin Franklin”

Crucial Risk Management Advice

Crucial Advice: Effective trading is based on disciplined risk management, not prediction certainty. Always use a firm stop-loss to protect your capital. Macroeconomic news, particularly from the Federal Reserve or the European Central Bank, can override any technical pattern instantly.

Profile Image of Ghulam Muhiuddin, Certified Technical Market Analyst, 18 Years of consistent market analysis and forecasting</strong>

About the Author

Experience: This analysis reflects the insights gained from 18 Years of consistent market analysis and forecasting, specializing in the application of the Elliott Wave Principle and advanced technical structures.