Nikkei 225 plunged 7.32%. What's next ?

Last Thursday Japan Nikkei 225 plunged 1,143 points (7.32%) and triggered a panic sell-off in other Asian and European bourses.

23rd May

However, when the US market was able to hold with the Dow Jones Industrial average closed about overnight level (-13 points), other global bourses stabilized in the following day.

24th May

The reasons for the plunge :-

1. Some members of the Federal Open Market Committee (FOMC) expressed willingness to reduce the US$85 billion a month of asset purchases.

2. Chinese manufacture PMI (an economic indicator) dropped into contraction territory.

Japan Nikkei 225 might have taken the above reasons as an excuse for its first major correction to its bull-run from 8534 (12th October, 2012) to 15,627 (22th May, 2013), a massive 83% gain within 7 months after the Bank of Japan announced its 1.4 trillion yen injection into the Japanese economy, but the reaction of other global markets does indicate that the global equity markets are being supported by only one thing, the massive money printing by the central banks.

As long as the central banks continue with their QE programmes, there will be excess liquidity available for the stock markets. But do remember,no bull market can last indefinitely, all good things must come to an end ultimately. For me, I shall go by the chart.

Dow has completed its sub-wave vii. Sub-wave viii may take a few more days to complete, it may end around 15,100 level. The next sub-wave ix may bring Dow to 16,000 level before the 8% to 10% wave (viii) correction sets in.

After the wave (viii), there is wave (ix) to go to at least 16,000 again (forming a double top) or higher. The interesting question is whether the correction after that is the major wave (6) correction,

Or it is the mega wave 2 correction that has a worst case scenario of a 100% retracement to 6547 level, a 60% drop.

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