Japanese stocks rallied today on Ben Bernanke’s dovish statements during US session yesterday. Nikkei 225 closed 1.32% higher than yesterday’s close, and traded higher consistently during the day, hitting higher highs and higher lows. With this gain, bulls have climbed to the highest in 8 weeks, and underlined the strong bullish effort that has reversed the bearish decline back in May. Nonetheless, we’re still more than 1,000 points away from 2013 highs, and that will continue to weigh on the brittle renewed confidence in BOJ and Abenomics, whose effectiveness has been debatable at best.
The signs remain good for now though, as we did not see any bearish correction from Futures prices when market opened this morning, suggesting that there isn’t any bullish euphoria, or at the very least, traders are cautious after overextending themselves upwards during off-market hours. The main bulk of the rally that allowed price to hit 8 weeks high is actually seen during Japanese midday, when the underlying stock market is still trading. This would mean that current prices are actually supported and affirmed, and provide us a good platform to trade even higher tomorrow should Europe and US markets remain bullish later today.
From a technical perspective, prices has managed to clear the 14,750 ceiling of 16th Jun which happens to be the confluence with the rising Channel bottom. This opens up Channel Top as a potential bullish target even though Stochastic readings are Overbought currently. However, if price does break below the rising Channel, it is likely that Stochastic readings would be below 80.0, which signals a bearish cycle. As such, 14,700 resistance turned support will be opened, and we could potentially even see a reversal of bullish fortune back towards 14,500.
Longer-term charts also show a strong bullish potential, with prices breaking above the 61.8% Fib retracement, allowing price to push towards the next level of Fib retracement. A structural trendline stands in the way currently, and should price break above this trendline, it is likely that bullish acceleration can take place for price to drive towards 15,000 and potentially beyond. However, similar to short-term charts, current stochastic levels are also overbought – this implies that it would be harder for price to break the rising trendline, but even if the rising trendline holds, there remains the possibility of price straddling along the underside of the trendline to trade higher. The possibility of a bearish correction should not be ignored as well, even though Stoch readings have proven to be overbought for a long period of time in 2013. Should readings start to collapse below 80.0 and preferably below early May levels, we could have yet another bearish cycle in our hands that could bring us closer to 12,000 once more.
Ultimately, we should be reminded that there is most likely not going to be any furtherance to BOJ’s stimulus package. Hence Nikkei 225 can only rely on its own stock fundamentals and global risk appetite for directions. Current flavor of the month continue to favor higher risk with Ben Bernanke being surprisingly dovish. As such, the threat of a potential pullback is not that imminent. However, with US earning seasons heating up, should results disappoint and push US stocks lower, do not be surprised to see S&P 500 and Dow 30 unraveling quickly, pulling Nikkei 225 down along with it as well.