Talking Points:

  • Can the Nikkei 225 hold on up here, and maybe even push higher?
  • Well, some of the signs are quite encouraging
  • But watch that possible double top

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The Nikkei 225 is around its highs for 2017, indeed it’s higher than it’s been since August 2015.

When an index is doing that, there are only two essential questions ever asked of technical analysis:

Can it stay up here, and if it can’t how bad could the damage be?

Well, to take those questions as they came, the near-term signs are quite encouraging. The Nikkei may be at a rarefied altitude but its moving averages are in the order which often suggests a degree of confidence. The shorter, 20-day remains well above the 100-day and the 50-day crossed back above the 100-day on June 2. That’s usually seen as quite a bullish sign.

Moreover, the index has been happy enough around current levels since about May 1. If there are those who are terrified of these heights, they’re keeping their fears in check quite well. The index looks comfortable in its new, higher range. And, while the Relative Strength Index is unarguably creeping toward territory which might suggest a degree of overbuying, we’re not there quite yet.

Technical Analysis: Nikkei 225 Looks Comfortable at the Top

That’s the good news. The slightly worse news is that the index hasn’t quite yet exorcised the spectre of a double top, which I worried about in my last technical look. Admittedly it has managed to get past the previous peak, June 5’s 20,125. But it has only closed above there once so far on a daily basis. It will need to do more than that to convince investors that a bullish breakout from that possibility is really in play.

As for the second question – how bad would the damage be from any reverse – well, that depends on the nature of that reversal. A classic double top might put all gains made since April on the table. However, a less-dramatic failure of nerve could simply see the index back in the narrow range which has endured since May.

Technical Analysis: Nikkei 225 Looks Comfortable at the Top

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX