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Talking Points:

  • The Nikkei 225 has lost puff since scaling the peaks of early January
  • Numerous attempts to retake them have ended in failure
  • However the downside hasn’t been tested too much either, which is an encouraging sign

Japan’s Nikkei 225 equity benchmark has stalled markedly since its quite impressive climb from November 2016.

That rise took the index up to 19570.7 on January 4, from lows of 16262.50 on November 11. The former level is a reasonably significant peak too, unmatched since late 2015.

But the going has been much heavier since. This year the index has made four attempts to break higher. All of them have stalled. The good news from a technical standpoint is that things could be about to get better.

As you can see from the red lines in the chart below, the Nikkei’s efforts to rise may have been abortive but they haven’t been altogether routed. Lower highs are clearly being offset by a procession of higher lows. The index is actually forming what is known as a Pennant pattern. This could be good news for Nikkei bulls.

Rising trendline unthreatened.

Nikkei 225 Technical Analysis: Pennant Setup May Mean More Gains

Compiled Using IG Charts

This is typically a continuation pattern and tends to indicate a pause in a trend rather than a turning point. They’re a sign that congestion is being cleared from a market, albeit slowly perhaps. And as you can also see from the chart that rising, white trend line from July 2016 is utterly unthreatened by current price action for all the index’s apparent dithering. In short the trend is still upward.

What tends to happen once a continuation pattern runs its course is a resumption of the action which preceded it. If that is the case this time then the Nikkei 225 could merely be girding itself for another move higher.

Have you always wanted to know more about trading the markets? The DailyFX trading guide is here to help.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX