The Dow Won’t Suffer the Same Fate as Japan’s Nikkei 225 – Here’s Why

Japan’s Nikkei 225 was in a parabolic bubble in the 1980s when the Dow Jones Industrial Average had a steady rise. The Nikkei has not recovered while the Dow fully survived its biggest one-day decline on October 19, 1987.
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Japan’s Nikkei 225 was in a parabolic bubble in the 1980s and set its all-time high in December 1989. Thirty-plus years later, this major global equity average has never fully recovered.

In the U.S. the Dow Jones Industrial Average ^DJI had a steady rise in the 1980s and fully survived its biggest one-day percent decline in history, 22.6%, on Oct. 19, 1987.

Here’s the weekly chart for the Dow since the 1980’s

The Crash of 1987 Is Just A Blip on the Dow Chart

The Crash of 1987 Is Just A Blip on the Dow Chart

Courtesy of Refinitiv XENITH

When you look at the weekly chart for the Dow, you can see the Crash of 1987 as just a blip. That’s the largest percentage one-day drop in history. 

I built this chart earlier this year to point out when I made major market-timing calls. 

What’s important is that the Dow was steadily rising in the 1980s, crashed in 1987 then continued higher.

Monthly Chart for the Nikkei 225

The Nikkei 225 Bubble Popped And Never Recovered

The Nikkei 225 Bubble Popped And Never Recovered

Courtesy of Refinitiv XENITH

The monthly chart for the Nikkei 225 shows the parabolic bubble of the 1980s. The all-time high of 38,957 was set in December 1989. The Japanese benchmark did not bottom until March 2009 following a low of 7,021.

The horizontal lines are the Fibonacci Retracement levels from the high to the low. These numbers are important to know after the low was set.

The green line is the 120-month simple moving average, which was technical resistance during the decline. After the low was set, this average became a technical support beginning in May 2013. This is now the key level to hold in March.

While above this average the Nikkei 225 moved above its 23.6% retracement level at 14,258. This led to a test of its 38.2% retracement at 19,195. 

Then came the problem. Japan’s benchmark tried several times to penetrate and hold its 50% retracement at 22,966 but failed. This challenge occurred several times between November 2017 and February 29, 2020.

This makes the 120-month simple moving average important to hold at 16,095 this month.

Monthly Chart for the Dow 30

The Monthly Chart for the Dow Is Approaching Its Most Important Levels

The Monthly Chart for the Dow Is Approaching Its Most Important Levels

Courtesy of Refinitiv XENITH

The monthly chart for the Dow shows the parabolic bubble for the decade-long parabolic bubble that formed between March 2009 and February 2020.

For the Dow I show the Fibonacci Retracement levels of the rise from the March 2009 low of 6,470 to the all-tine intraday high of 29,568.57 set on Feb. 12, 2020. 

This month the Dow failed to hold its 23.6% retracement at 24,163 and its 38.2% retracement at 20,784.

This puts the focus on its 50% retracement at 18,052, which lines up with its 120-month simple moving average at 18,010. 

This average provided a buying opportunity as the Dow was bottoming between December 2009 and October 2011.

With both the Nikkei 225 and Dow 30 trying to hold their 120-month simple moving averages, they are more similar today than they were in the 1980s. 

Holding these levels should help the major global average stabilize if the spreading of Covid-19 subsides.