Nikkei 225 collapsed more than 6% on Thursday as an embodiment of a vote of confidence against Abenomics. This is not the first time in recent days price has suffered such a strong decline. In fact, price has shed around more than 5,500 points in 3 weeks, and the 6% decline seems like just “one of those days” when put alongside the past 3 weeks. Hence it is a pleasant surprise to see price rallying 1.94% today, breaking the consecutive 3 day decline that has been plaguing price this week.
However, today’s rally is far from a bullish showing that can break current bearish sentiment. In terms of magnitude, this gain pales in comparison from Monday’s 4.94% gain. In terms of importance, the rally failed to reach 13,000, which is a key psychological level that could have swayed sentiments to the bull side. Looking at fundamentals, it seems that the rally today is a simple case of technical rebound (aka dead cat bounce) and does not represent any bullish recovery in any shape or form.
The verdict is even more damning when we look at Future prices. Price recovered during US hours yesterday due to an influx of risk appetite flows on the back of stronger US stocks. This allowed N225 Futures to climb back up above 13,000, but price was unable to break the descending trendline that represents this week’s decline. This failure to break the descending trendline can be attributed to the fact that physical stocks traders were less bullish than their Futures counterparts, which resulted in a huge revaluation of Futures when the underlying Stock market opened. If we look at price from Futures’ perspective, the 1.94% gain in stock is a sign of strong bearishness, and certainly not cause for joy.
Monthly Chart continues to look bearish, though we are slightly better than before with price currently trading above the 50.0% Fib. If Jun ends today, current set up would be considered bearish, but a close below 50.0% Fib will result in a even stronger bearish Evening Star pattern that could potentially allow for stronger bearish acceleration towards 38.2% Fib in July.
At the risk of sounding like a broken record, it should be said again that BOJ has basically ran out of ideas for now. Kuroda et al have not even attempted to acknowledge the magnitude of decline in stocks, and the high volatility in JGB yields. It seems as though the are stuck in the “Denial” stage of Loss and Grief, insisting that Japanese economy is doing well, Abenomics is working, current decline is just a “correction” etc. Without tackling the problem head on, it is unlikely that market will regain confidence in Abenomics and BOJ’s credibility, and bulls will have very little to hold onto for rallies to take flight.
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