Talking Points:

  • The Nikkei 225 looks a little stuck, even if it is stuck at quite a high level
  • Still, the index is making higher lows with some regularity
  • A pennant could also be forming on the daily chart, even if some caution is warranted on this

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In some respects the Nikkei 225’s technical picture has altered little since I last looked at it a week ago.

The index remains at first glance very much where it was; a shade below this year’s overall highs but certainly holding on at a relatively elevated level.

However, appearances can be deceptive. For there have been some changes to the picture and they’re quite encouraging ones for any bulls out there even if they’re hard to spot. For one thing the trading range has narrowed somewhat, in that its base is now clearly a little higher. Last week we were looking at 21,853, now it’s more like 21,173. At face value this looks encouraging. Not only are we seeing “higher lows”, but the pattern looks broadly consolidative which may mean that the index pushes on higher once it breaks.

Nikkei 225 Technical Analysis: Just Hanging On or Ready for Takeoff?

A similar story is told by what appears to be an evolving “pennant” pattern on the daily chart. This pattern occurs when an upward sloping support trendline appears to converge with it opposite- a downward sloping resistance line. Classically speaking this, too, is a consolidation pattern, portending a revival of the status quo ante once it has been played out.

Nikkei 225 Technical Analysis: Just Hanging On or Ready for Takeoff?

A word of warning may be in order though. While the upward-sloping trend-line looks quite reasonable and valid, its downward sloping companion is, let’s say, a little more speculative. As you can see it’s really validated by only that 2017 peak and a single intraday high. This doesn’t necessarily render it redundant, but it probably bears pointing out nonetheless.

Those currently uncommitted might want to wait to see if there are any ‘higher highs’ made once the pennant formation reaches its natural end, to accompany the higher lows already seen. For the moment they do seem to be an obvious missing piece of the Nikkei’s directional puzzle.

Note that the index doesn’t look either oversold or overbought to any great degree at present. That is a probably welcome change from the situation in early November. Back then it was overbought with a vengeance. Now its Relative Strength Index has collapsed back to a sober 54, well below the exuberant 80-plus levels hit back then. The safety zone is generally considered to be between 30 and 70. That the Nikkei can look so relaxed at current levels is probably also a reassuring sign.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX