A reader asked me to take a longer look at the Nikkei Index (^N225: 9732.51 +63.55 +0.66%), which stemmed from my prior post “NASDAQ and Nikkei - Is History Being Remade?” The following post is an added to show that longer term perspective which shows a massive rise followed by a massive decline - perhaps more shocking than many people expected with the index roaring at all time highs just over 20 years ago.
Let’s see the multi-year chart of Japan’s Nikkei Index:
I’m still surprised when I take a look at this chart. It looks similar to the US NASDAQ Index (^IXIC: 1850.02 +24.10 +1.32%), only the correction has taken a much longer period of time and there is no hope of returning to the 38,000 peak any time soon - it may take years or even decades to do so again.
The main lesson to learn is that “irrational exuberance” does not pay - meaning, when something looks to good to be true (as in, a market looks like it can never go down), it’s often the end of the ride.
Price can rise faster and higher than almost anyone expects it to - I’m sure there were plenty of Nikkei Bears as price skyrocketed to new highs in the late 1980s who were ultimately right, but early as price overshot their targets to the upside.
Price then turned around and began to overshoot all targets to the downsde, reaching almost a 30 year low in late 2008 and early 2009.
Another lesson is that price can travel further to the downside than most people - even the most hardened of bears - expect.
I still think it’s optimal to take a “next swing” approach to trading a market or index - have the larger structure in mind but always be looking for what the next likely “swing” or immediate move will be. That’s ultimately where you will make the most profit with the greatest risk control.
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