Nikkei 225 Technical Outlook: An Extended Pause


The price pattern developed in the Japan Nikkei 225 index over the past two years appears to be a pause, rather than a reversal of the multi-year uptrend.

Despite the weakness across its peers last year, the Nikkei 225 index has been resilient, which is partly a reflection of the trend developed in recent years (see monthly chart). The major double bottom (the 2003 and 2008/2009 lows) triggered in 2015 set the stage for the reversal of a multi-year bear market. The subsequent higher-tops-higher-bottom pattern on longer-term charts is a reflection of the uptrend.

Nikkei 225 Monthly Chart



Having said that, the uptrend has been choppy, which is a reflection of an unwinding of a two-decade-long bear market. Still, the index held key support levels during the period of elevated volatility across financial markets, including the Covid selloff and the 2022 broad market weakness.

Zooming in on the weekly charts, the index has been holding above quite a strong converged cushion: the 200-week moving average and the 2018 high. There are tentative signs of some improvement in upward momentum on lower timeframe charts. In this regard, any break above the immediate hurdle on a horizontal line from early 2022 (at about 28500), slightly below the August high of 29200, could set the stage for a resumption of the long-term uptrend, initially opening the way toward the 2021 high of 30795. Any break above could pave the way toward 32000-33350, including the 78.6% retracement of the 1990-2008/2009 decline and the mid-1990 high.

Nikkei 225 Weekly Chart


From a fundamental perspective, Japanese equities have been resilient in recent months, thanks to the ultra-easy Bank of Japan’s (BOJ) monetary policy and the weakness in the yen. Furthermore, the Japanese economy continues to recover on consumer spending. However, if the BOJ decides to hike aggressively to tackle accelerating inflation, it could hurt equities.

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