Nikkei 225 underlying stocks is currently trading around 1.7% lower than yesterday’s close, and one would be forgiven thinking that N225 is currently extremely bearish. However, the truth is slightly different – no the trend is certainly not bullish, but the underlying stocks may not be as bearish we think.
Looking from Futures prices, price was already trading lower during US trading hours, after being pulled down by the bearish US markets which saw S&P 500 closing at -1.02% and Dow at -0.76%. Prices touched 13,000 briefly then, but recovered strongly, showing the strong resolved of 13,000. From a technical perspective, price is currently aiming higher after being supported by the rising trendline that kept the decline of 6th Jun in check. Stochastic readings are also pointing higher after bouncing from the 20.0 level. This slightly bullish outlook can be seen from the actual underlying stock index, which is also trading slightly higher after the early morning dip following the gap lower – which can be easily explained by physical traders playing catching up to the futures price (they don’t always agree, and stock price direction trumps futures but in this case they agree).
Nonetheless, overall bearish pressure still remain. Technicals tell us that the 13,200 ceiling remains, and price will need to clear the immediate ceiling and preferably above 13,400 (Monday GDP announcement high) to restore bullish pressure for this week. Similarly, Stochastic readings may be forming an interim peak soon with current levels approaching the levels where the previous 2 peaks were formed less than 24 hours ago. If pass history repeats itself, then we may find price unable to break 13,200 with Stoch levels moving lower from here.
Fundamentally, Nikkei 225 is a net loser this week after 1 major good news – Stronger GDP and 1 major bad news – BOJ not doing anything. However, it is likely that both scenarios have been mostly priced in – decline during US hours happened around midday trade, not initial open which suggest that US traders were not selling N225 futures as a reaction of BOJ. If this assertion is correct, that means N225 is actually inherently weak, which is not really a surprise considering the huge declines seen from the 16,000 fall. This would also mean that if global stocks are weak, expect N225 to react more negatively, and less bullish even when global stocks are picking up.
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