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Nikkei 225 Technical Analysis: Better Buy Levels May Lie Ahead

Nikkei 225 Technical Analysis: Better Buy Levels May Lie Ahead

David Cottle, Analyst

Talking Points:

  • The Nikkei 225’s fall looks corrective and perhaps even much needed
  • Fundamentals from earnings to local bond yields would seem to suggest it will remain well supported
  • The current range may be all investors have to play with for a while though

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The Nikkei 225’s quite dramatic fall from January’s 26-year highs seems to have been arrested. But can this last or is another leg lower already in the offing?

Having peaked at 24,189 on January 23, the index fell as low as 20,452 on an intraday basis back on February 9. It has since recovered somewhat and for the last couple of weeks has been trading a daily-closing range between 22,065 and 21,160.

That range looks safe enough for the moment and should probably be treated as valid at least for the next week or so. There has been a bearish crossover in the simple moving averages, whereby the 20-day has slid below its 50- and 100-day counterparts. However, coming at the same time as a quite sharp global stock down move, this may not be terribly significant. What may be more so is that the 50-day could be about to cross below the 100. That hasn’t happened yet, but it could and it might be a bearish signal if it does.

It’s worth bearing in mind too that the current range base is not very far away from 21117.8. That level is the fourth, 61.8% Fibonacci retracement of the Tokyo stock benchmark’s climb up from the lows of September 8 last year to the impressive highs of 2018. The final, 76.4% retracement before the rise is completely negated would come in now at 20,392.2 and that might be a level to watch if the current range gives way.

But, straying towards the fundamentals for a moment, it might be wise to consider any further Nikkei falls as at least a possible good buying opportunity. It can be quite hard to find an analyst who is broadly pessimistic on Japanese equity’s chances right now. The last quarterly reporting season saw nearly 70% of Nikkei 225 components beating estimates, and the spread between index earnings and the Japanese ten-year yield is not very far away from its widest in ten years.

Given both of those factors, current weakness may very well turn out to be a simple and arguably much needed correction. Once it’s over the index may yet push on, even if it goes still lower in the short term.

--- Written by David Cottle, DailyFX Research

Follow David on Twitter: @DavidCottleFX or use the Comments section below to get in touch

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