Talking Points:
- Last week’s falls took the Nikkei below its old trading range
- However, the fightback has begun and old support has been regained
- This is perhaps not the time for heroics
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Watch and wait. These might be the best three words you’ll read this week regarding current Nikkei 225 trade.
Admittedly things don’t look great for Japan’s equity benchmark, at least on its daily chart. Three painful straight days of falls, culminating in August 10’s long slip, have taken it below support which before had held doggedly since the start of May. It also looks as though the index is in the process of forming a new “lower high.”
However, neither the fall nor that lower high can be regarded as conclusively proven yet. There’s still clear appetite to buy the index even at current, still-elevated levels. Five days out of the six since that August 10 fall have seen the Nikkei rise, putting it comfortably back in its former trading range.
Admittedly the bulls have yet to retake the upper reaches, where the index had previously looked very comfortable. If they can’t then something more serious may be expected to the downside.
But it still too soon to suggest that they won’t. Therefore the weekly close, and next week’s early price action, may be critical.
It’s also worth noting that the index is now below its 20-, 50- and 100-day moving averages, which might argue that current selling has gone a little far. That said the 20-day has crossed below both of its longer-term counterparts and for many that will send a bearish signal.
To sum up then, the Nikkei is showing signs of weakness such as we haven’t seen for quite a while, but has yet to stray so far from recent trading norms as to make them a compelling argument to go short.
So yes, watch and wait, if only for this week’s close. If it still looks then as though a lower high is forming, the index could be in trouble. On the other hand if the bounce endures then we could be back to where we were before those August falls- busy doing nothing much, to be sure, but at altitude.
--- Written by David Cottle, DailyFX Research
Contact and follow David on Twitter: @DavidCottleFX
