Shinzo Abe’s ruling coalition won a comprehensive victory during Sunday’s election. This win allow Abe’s party to have a stronger mandate despite falling short of forming a majority of its own. Nonetheless, the coalition will allow Abe uncontested implementation of Abenomics, which will certainly be a positive for Japanese stocks and continued Yen weakness. True to form, Nikkei 225 opened higher, gaping almost 200 points from Friday’s close, representing a more than 1% increase, suggesting that market is agreeing that the LDP victory is a good thing.
Looking at Nikkei 225 Futures chart below, one would immediately notice that there isn’t any bullish candles in sight since the start of Monday’s trading. Prices did push up higher on market open (still stocks off-market hours), but the gains were quickly erased after 20 mins of trading, with price pushing sharply lower from the 14,950 high which was further exacerbated when the underlying Tokyo Stock Exchange opened proper, with price dropping 200 points lower in a heartbeat due to revaluation of Futures based on actual Stock index levels. With this sort of price action, it is hard to conclude that the market is actually liking the election results. Even though the underlying Nikkei 225 index is trading higher, we need to ask ourselves whether the gain is due to the election results or in spite of it.
If we compare last Friday’s price action, we would notice that Futures prices did climb higher during the latter part of US trading hours. As such, today’s gains for Nikkei 225 underlying can be attributed to the fact that prices are basically trading higher due to technical pullback following early Friday’s sell-off. Risk appetite flow isn’t a good explanation considering mixed US results which saw S&P 500 closing 0.16% higher but Dow 30 -0.03% lower. Another alternate solution is to treat the late Friday rally as a result of price pushing higher on speculation that LDP is earmarked to win this election, and hence the sell-off is your typical “Buy the Rumor Sell the News” common variety. Whichever explanation you deem is more appropriate, the conclusion is the same – market reaction to the election win is definitely not bullish, unlike what stock gain percentage would have you believed.
From a technical perspective, price has cleared 14,750 and 14,650 structural supports, while the supporting Kumo has also been penetrated easily to the downside. All these point to a strong bearish momentum which according to Stochastic readings – still have legs to run. From a price action point of view, this morning’s initial rally has also failed to test last Friday’s highs convincingly, which does not bode well for current’s uptrend that has been in play since late June. There are some saving graces for bulls though. Current lows are still 200 points away from Friday’s lows, which is a good sign that bulls around 14,400 – 14,600 remains robust. Forward Kumo is still bullish, and a bearish twist is not yet in sight. Furthermore, looking at where stochastic level is currently, it is highly probable that Stoch levels will hit extreme oversold territories should price continue towards 14,500 and below on this move. This increases the likelihood of a bullish pullback of some sort occurring.
Fundamentally, there are some legitimate concerns with regards to such a landslide victory for Abe’s coalition. With his positions entrenched, there would be less incentive for him to continue with his economic reforms, and allow him to implement more unpopular measures which could hurt the economy (e.g. Adviser Hamada’s suggested sales tax). This is perhaps why market is not entirely sharing the joy with Shinzo Abe right now. Give a man too much power, and he may start to renegade his promises to the masses.
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