Nikkei 225 gaped higher on open this morning on the back of stronger US stocks close on Friday. However, the optimism evaporated quickly, with the day transforming into a one-way journey south. It is worth noting that the price gap was not enough to overtake the previous week’s high of 13,513, highlighting the strong bearish sentiment above 13,500. This bearish sentiment can be extended below to 13,325, which was the ceiling back in early last week. Furthermore, price has also broken below the 13,150 support which was the ceiling back on 18th June and floor back on various points last week.
With the break of 13,150, an Adam/Adam double top has formed and this open up the base of the first top – around 12,750 as a possible bearish target, with 13,000 providing some interim support. It is possible that 13,000 still manage to hold out even with a Double Top bearish pressure weighing, as Stochastic readings are currently hitting Oversold, and bears may find it harder to break 13,000 due to it being a psychological round number and is within the midst of consolidation zone back on 18th June.
From a longer-term perspective, price is still sitting above 12,650 support but below the 13,525. As long as 13,525 is unbroken, the decline from May will not be negated and the pressure to re-test 12,650 will continue to weigh prices. However, if 12,650 manage to hold out, the longer-term uptrend will remain in play and this will help price to maintain a bullish outlook (at least from a technical basis) in the longer term. A break of 12,650 may be disastrous for bulls as the breakout on BOJ 2013 stimulus plan would be invalidated. Given current lack of confidence in BOJ and Abenomics, trading below the post BOJ announcement levels will be a huge morale deflator for even the staunchest of Abenomics supporter. We could potentially see strong bearish acceleration lower and potentially allow bears to unwind all the gains of 2013.
Fundamentally, there isn’t any strong reasons for Nikkei 225 to continuing rallying. Recently, Japanese leaders have changed their tune slightly with regards to the recent slide that we’ve seen in Nikkei 225 – instead of saying Abenomics is still working and that the decline is “normal” and already “expected”, they chose to focus on the benefits of weak Yen on stocks and exports. This is highly peculiar as Japan has previously promised G20 that they will not focus on a weak currency to revitalize the economy, but rather the weak currency is simply the “collateral damage” due to their own version of Quantitative Easing to boost the economy. Such statements reek of desperation, and suggest that Japanese leaders are currently on their wits end – which lends weight to the hypothesis that Nikkei 225 may be unraveling quickly with no proper BOJ response should 12,650 breaks. If this happen, we could potentially see Nikkei going back to sub 10,000 levels and potentially even lower. With US stocks and European stocks climbing lower on global risk aversion, Kuroda et al will need all the luck they have in order to avert the disaster.
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