Japan's NIKKEI: Where Would It Be Now If Not for The Earthquake?

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Japan's NIKKEI: Where Would It Be Now If Not for The Earthquake?
In the financial markets, not every action has an equal and opposite reaction

By Nico Isaac
Wed, 16 Mar 2011 11:15:00 ET

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There are events so devastating in their impact, and so unsettling in their blink-of-an-eye destruction, that no one closest to it -- or even those on the opposite ends of the world -- remain unaffected. These are the moments that permanently reshape the rings inside the trunk of human history; little divots that signal a sudden drought, or narrow streaks that indicate unforeseen famine.

Wars, economic scandals, the cold-blood killing of political leaders, natural disasters... The man/woman on the street reacts. World leaders react. The global media network reacts. And yes, stock markets around the world react.

But the widespread assumption that the long-term trends in the financial markets are determined by events such as these is not true.

This groundbreaking insight was presented by Elliott Wave International president Robert Prechter in the May 2004 issue of his monthly Elliott Wave Theorist. There, Bob began his commentary in this way:

"Most financial analysts, economists, historians...believe in the physics model of finance, where action is followed by reaction. That good news makes the stock market go up, and bad news makes it go down. This is not true."

To prove his point, Bob presented compelling charts of the DJIA in the aftermath of two of the most unforgettably horrific events in the U.S. history of the past 50 years: the assassination of President John F. Kennedy in November 1963 and the terrorist bombings of New York City's Twin Towers on September 11, 2001.

As you can see, in both cases, the Dow's initial fall following the event was not only short-lived, but also retraced quickly thereafter as the market persisted to rise.

Each time, the emotional response to these events was both lasting and without measure; never to be forgotten. But, as hard as it is to believe it, the impact on the stock market in the long term was negligible.

And that's one of the core tenets of the Elliott Wave Principle: Broad trends in the financial markets do not unfold as reactions to news -- but rather develop as a reflection of collective human psychology. It marches to its own drummer, so to speak, and unfolds in calculable wave patterns that are both measurable and foreseeable. It's not the news, but the sequence of those Elliott wave patterns that determines the market's trend -- sometimes long before a news event, in retrospect, is ascribed to be the market catalyst.

That brings us to the latest news from Japan. On March 11, one of the tragic events we talked about above took place when Japan's eastern coast was struck down by a magnitude 9.0 earthquake, the biggest in the country's history.

Japans' NIKKEI 225 stock index has suffered a 3000-point collapse since the catastrophe. At first glance, that fits the "news-moves-markets" theory perfectly.

But let's take another look. Was there anything about the NIKKEI's Elliott wave pattern that suggested a decline before the earthquake? Yes.

In the March 8, 2011 Asian-Pacific Short Term Update, we wrote:

"The weekly chart [of the Nikkei] shows the vulnerability to a decline now present. Watch the 10,400 level closely. A break should generate fresh selling pressure."

Then, the March 10 Asian-Pacific Short Term Update added:

"We expect accelerated selling."

This doesn't mean that the NIKKEI would have suffered the same dramatic fall even if the earthquake never happened. Certainly the news of the disaster helped to accelerate the selling pressure. But, as you can see, Elliott wave patterns in the index suggested before the event that the collective psychology of the NIKKEI participants was ripe for a bearish reversal, bad news or not.

From the staff at EWI, our hearts go out to those who have experienced loss in this recent disaster. Our Asian-Pacific analysts are working diligently to keep subscribers updated via daily analysis of the region's markets.

Tags: Efficient Market Hypothesis (EMH), Elliott Wave Principle, Elliott Wave Theorist, Nikkei, Robert Prechter, Robert Prechter

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The Elliott Wave Principle is a detailed description of how financial markets behave. The description reveals that mass psychology swings from pessimism to optimism and back in a natural sequence, creating specific Elliott wave patterns in price movements. Each pattern has implications regarding the position of the market within its overall progression, past, present and future. The purpose of Elliott Wave International’s market-oriented publications is to outline the progress of markets in terms of the Wave Principle and to educate interested parties in the successful application of the Wave Principle. While a course of conduct regarding investments can be formulated from such application of the Wave Principle, at no time will Elliott Wave International make specific recommendations for any specific person, and at no time may a reader, caller or viewer be justified in inferring that any such advice is intended. Investing carries risk of losses, and trading futures or options is especially risky because these instruments are highly leveraged, and traders can lose more than their initial margin funds. Information provided by Elliott Wave International is expressed in good faith, but it is not guaranteed. The market service that never makes mistakes does not exist. Long-term success trading or investing in the markets demands recognition of the fact that error and uncertainty are part of any effort to assess future probabilities. Please ask your broker or your advisor to explain all risks to you before making any trading and investing decisions.