Talking Points:

  • The Nikkei 225 remains at highs not seen for 26 years
  • This week has seen an attempt to strike out higher peter out
  • However the underlying uptrend looks secure

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The Nikkei 225 bounded up to new 26-year highs this week. General risk appetite met the twin national specifics of a strengthening Japanese economy and extremely accommodative monetary policy to put the index in a very sweet fundamental spot indeed.

There have been a couple of down days, possibly engendered by news of reduced bond purchasing from the Bank of Japan. This in turn prompted chatter about the chances of some of the country’s more extreme and unconventional monetary stimulus being withdrawn. But so far chatter is all investors have.

Of course the only technical questions which really matters at altitudes such as these are can the index stay up, and can it push on? Well, in the short term at least both can be answered with, ‘yes, probably.’

On the daily candlestick chart below you can see an uptrend line drawn from the intraday low of December 6. This line looks promising –again for a short or medium term indication- because it has a nice bit of validation in the two closely spaced intraday lows of December 29 and January 2.

Nikkei 225 Technical Analysis: Upside Test Fails But Uptrend Holds

A channel drawn from December 6 and encompassing all trade reveals that this week has seen the rejection of an upside push. However, it’s equally clear that the channel’s lower bound is some way below the market at the moment –around 22.790.

More broadly the index would seem to have plentiful support around that psychologically important 23,000 and on down to 22,400 or so. The benchmark has been consolidating hereabouts since the end of October.

Below that there’s region bounded by the shaded area in the chart below which might merit a look.

Nikkei 225 Technical Analysis: Upside Test Fails But Uptrend Holds

The market has not been minded to keep the index in that box for very long in the recent past- rather trading out of it to the upside. Of course it hasn’t been tested very recently and it would probably be asking too much for it to stand in the way of any more serious downside test. But it could still bear watching.

However the uptrend we initially discussed probably makes the best near-term indicator. It remains in place so bulls are probably justified in their hopes for more goodies ahead, even given the bounty they’ve already enjoyed.

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter: @DavidCottleFX