The quarterly Tankan Survey that was released this morning prior to Japan open showed sentiment amongst large manufacturers turning broadly positive, with the index coming at +4, the first positive print since 2nd Oct 2011. This is a huge improvement from previous quarter’s -8, and similar beat expectations of a +3 read. Nikkei 225 understandably gaped higher on open, with the underlying index started at 13,746 as the first tradable price, more than 70 points higher than last Friday’s close. This positive news release continues the slew of better numbers released last week, which saw stronger than expected Retail Trade and Industrial Production numbers.
Nonetheless, despite this huge flip of sentiment in Japan largest manufacturers, the gap in underlying stocks did not match the overextending Futures, which was trading closer to 13,800 before Japan open. This resulted in a quick revaluation of Futures downwards which impacted the underlying stocks index, with actual Nikkei 225 index trading immediately lower on open, pushing below last Friday’s open to trade around 0.28% lower D/D currently.
This is a very important observation, as price was already leaning on the bullish side with the last ditch rally on Friday, which saw Nikkei 225 dodging the formation of an “Evening Star” bearish reversal pattern. This in itself should have easily allowed price to gap up this morning, while the stronger than expected Tankan Survey would have been the afterburner that would send the bull plane soaring up even higher. The fact that this didn’t happen suggest that the underlying bears are still lurking around. But before we make hasty judgement, perhaps it will be good to see if price does recover above Friday’s close towards the later part of the trading session, especially since it may be possible that bulls are simply spooked due to the over-extension by Futures traders early in the day.
From a technical perspective, price is currently trading below the rising trendline that characterized the rally last Friday. Current trendline break may not be as critical as compared to the break of consolidation floor between 13,670 to 13,790, which, is the levels which prices were holding when the underlying stock market was still opened. Should price break below the consolidation, the entirety of Friday’s rally may be at risk and we could potentially see the invalidation of the rally that “saved the day”, sending short-term bias back to the bearish side especially if 13,500 support is breached. Stochastic leans favorably to such a scenario with both Signal/Stoch lines pointing below, with both lines looking likely to push below the Stoch “support” level around 70, where a previous trough sits.
What would today’s decline mean on the longer day chart? Right off the bat, the 61.8% Fib retracement would be looking more likely to hold, which opens up 13,000 and 50.0% Fib as possible targets should short-term bearishness translates into longer-term bearish pressure. As it is right now, due to last Friday’s price move, the immediate bearish danger has been averted, allowing the longer-term bull trend to remain. However, should this month’s candle trade below the body of June’s “Hammer”, it is possible that bearish acceleration may take place to to push prices faster towards the downside targets mentioned above. On the other hand, should bulls do manage to clear the 61.8% Fib, acceleration towards 1,4450 ceiling may occur, and a break of which will allow a stronger conviction that the bullish trend is back on full throttle.