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Nikkei 225 Technical Analysis: Time to Pause Before Pushing On?

Nikkei 225 Technical Analysis: Time to Pause Before Pushing On?

David Cottle, Analyst


Talking Points:

  • The Japanese stock benchmark is sitting close to 21-year highs
  • However, it does look a bit overbought so consolidation is probably in order
  • It’s probably also worth keeping an eye on the Japanese Yen

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The Nikkei 225 is scaling peaks not seen for nearly 21 years.

Borne aloft by improved corporate earnings cheer and optimism over broader Japanese economic strength the Tokyo benchmark closed Wednesday at 20,881.27- it highest close since December,1996. A weaker Japanese Yen has probably also played a big part in the index’s strength, as it’s sight which usually cheers investors in Tokyo’s plentiful export giants.

Unlike its US counterparts, however, which seem to make fresh all-time highs almost daily, the Nikkei remains some way short of its best ever closing high- 1989’s 39,915.87. Still, its performance has been impressive and certainly looks backed up by the fundamentals, but what does the technical picture look like?

Well, the index is sitting very comfortably towards the centre of an uptrend channel drawn from September 8’s lows. For as long as it remains there the bulls should be emboldened to try for the psychologically important 21,000 level at least and, maybe, the uplands beyond.

That said we have already seen a very impressive upward run, with green candles clearly dominating the daily chart for nearly 30 sessions. It should probably come as no surprise then that the index should look a little overbought. And indeed it does. The Relative Strength Index for the daily chart currently tips the scales at a weighty 76. That’s well over the 70 level which usually sounds warning bells and suggests that the buyers have become a little too exuberant, at least in the short term.

Still, for the moment any weakness will probably be consolidative as bulls attempt to build a base from which to strike out higher. The chart’s moving averages still look reasonably bullish despite recent action. The 20-day average crossed above the 50- and 100-day versions in late September and now the 50-day looks set to cross the 100-day too. This would be another traditionally bullish sign and is worth keeping an eye on.

It’s probably also worth watching the USD/JPY chart too. The greenback has scored impressive gains since September after spending much of the year on the ropes. But it has also spent the past two weeks doing very little and, if the bulls are going to take it higher, it’s not clear what exactly might be stopping them.

It’s not a dead cert that Nikkei strength requires Yen weakness, but it is very often the case.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.