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Sunday, November 22, 2009

The Nikkei-DJIA (Dow) Relationship

The Nikkei topped in 1990 and hasn't looked back since. The Japanese are familiar with deflation. They have been fighting it off and on for 20 years. Their government has "zombified" their banking system after a real estate bust and yet still they have deflation. What do they have to show for it? A debt-to-GDP ratio of some 200%.

Does anyone think they will ever be able to pay that debt off? Denial is really not a strong enough word for the times we are living in.

Indeed when everyone is looking at the United States's situation with debt, many haven't considered that there are others who are likely to implode before we do. United Kingdom, the Japanese, The Chinese, and the Russians are all living on borrowed time and money. And the people of the Eurozone have a common currency that is not even hardly 10 years old just yet.

When people suggest they will "go live somewhere else" and emigrate from the U.S. for whatever reasons economic or otherwise, just haven't tuned into the rest of the world. There are no safe havens.

Not in the U.K.
Not in Japan.
Not in the Eurozone.
Not in Russia.
Not in China.
Not in Australia.
Not in India.
Not in South America.
Not in Canada.
And not in Africa nor the Middle East.

All our economic boats are tied together at this stage in world history.

So why did the Japanese top out so early in 1990? My answer would be that if any single nation could have achieved this it would have been Japan. Elliott Waves is a social structure. Japan was (and still is to a good degree) an isolated island nation and people. To have achieved things in isolation makes sense. [EDIT: Think in terms of societal social mood isolation not the fact that they are the world's number 2 economic powerhouse]

1. The first long term chart suggests that the Nikkei is performing a double Zigzag for a Supercycle degree (a) wave of a Grand Supercycle wave [IV]. The first cycle zigzag bottomed in 2003. That was followed by a cycle wave 'x' (pink).

Some things I noticed: 1) The giant falling wedge to the 2003 low. 2) The 2000 Nikkei high was after the Dow Jones Industrial Average (Dow) peaked. The 2003 low was after the Dow made its low. 3) The Nikkei made its low in 2008 not in March 2009.

2. The 2007 Nikkei chart shows the relationship between the Dow and Nikkei. Instead of the Nikkei topping (2000) and bottoming (2003) after the Dow, the Nikkei/Dow relationship had reversed again. Now the Nikkei was topping early by over 3 months. The Dow's peak occurred on a Nikkei wave (2) retrace.

3. The 2009 current Nikkei shows that it topped over 2 months ago and has a noticeable H&S pattern. Its is getting close to "oversold". If the recent relationship between Dow and Nikkei remain, then the Nikkei should bottom on a wave (1) - in meeting a head and shoulders target - and retrace deep up on a wave (2) as the Dow makes a new high perhaps.

The overall conclusion shows that the Nikkei and Dow usually diverge at many degrees of trend. The Nikkei topped in 1990 is one divergence. Then the highs of 2000 and lows of 2003 is another divergence in which the Nikkei trailed the Dow. Then the 2007 highs the Nikkei reverted to leading the Dow again. This was matched by the Nikkei leading to a low in 2008 and not 2009 as the Dow did.

And once again the Nikkei may still be leading. But the pattern also suggests that after the Nikkei finishes its current correction and gets oversold on the daily, it will retrace back up to relieve its oversold condition. This rally on the Nikkei may just be a Wave (2), or perhaps it squeaks a new high.

At the same time the Nikkei finishes moving lower in its current correction, the Dow should also be correcting deeper. So I expect some more Dow weakness to come over the next week(s). Then when the Nikkei rallies from oversold, the Dow may indeed rally back upwards or, as in the case of the 2007 chart, the Dow may make a new high altogether during the Nikkei's wave (2) rally.

Does that all make sense?
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