Japanese stocks have been pushing higher consistently this week, with the N225 composite index climbing above 15,000 in the process. Traders were extremely bullish about Japanese stocks due to strong BOJ’s commitment to ensure inflation and economic recovery, which is further aided by the severely weakened Yen.
During such bullish euphoria, it is likely that traders may find any reason to buy, however flimsy it may be. Hence should there be strong bullish fundamental news, it will not be wrong to expect bulls to go into a buying frenzy, pushing price up to the stratosphere easily. Today’s GDP data release can be considered a strong bullish fundamental news – Q1 GDP (annualized) came in at 3.5% vs expectations of 2.7%, while Q/Q growth came in at 0.9% vs 0.7%. The only disappointment was the Nominal GDP which missed expectations by a mere 0.1%, coming in at 0.4% vs analyst forecast of 0.5%.
Given the strong bullish backdrop, we should be seeing a strong bullish action that could bring us to a new Weekly High. However that didn’t happen, and stock prices started to unravel quickly.
The N225 price is now forming a 3 Black Crow pattern which has broken the interim support around 15,150. However the support level’s strength was always suspect due to the fact that the consolidation level above 15150 was formed after the underlying stock market has closed. A more relevant support would be around 15,050, which was yesterday opening session’s support. In any case, the 3rd black crow has broken that anyway and price is currently teetering on breaching into the Kumo.
Stochastic tells us that current bear cycle may face headwind with readings closing into the Oversold regions and previous Stoch troughs levels not too far away from here. Furthermore, Kumo is expected to provide some bullish buoyancy, and should Kumo be breached, the next level of support around 14,925 ( 14th May swing high) may provide some interim support alone the way.
Nonetheless, the latest reaction to the GDP data should be alarming for those who are still betting on euphoria. Given the strong rally pretext, the failure for price to push higher but instead head lower smells like a classic “buy the rumor sell the news”. If this is true, then it suggest that bullish euphoria is ending if not already ended, and price would start to unravel quickly.
Daily chart shows a potential Gravestone Doji or a Shooting Star waiting to close. This would be the most bearish signal that price has shown since 27th April, the maribozu candle that helps to form the Evening Star pattern which ultimately failed. The same could still happen this time round. Price may still find support from both rising trendlines even though Stoch readings have been firmly Overbought. We are only likely to find out next week though, as the Evening Star pattern will only be formed if tomorrow ends with a bearish candle too, and it will be up to next week’s trading action to determine if we have a proper bearish reversal on our hands or yet another bear trap.
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