Nikkei 225 – Surprise Rally on 1st Day of August

Well, that is unexpected. Even though we’ve mentioned yesterday that a bullish US GDP and dovish FOMC statement will have the off chance to send Nikkei 225 higher, the manner in which Nikkei 225 has rallied today is certainly surprising. First off, price didn’t gap higher, but opened at where we left off yesterday, suggesting that market isn’t exactly extremely bullish about the happenings in US, which would have translated into a morning gap higher if traders were indeed bullish due to overnight events. Price traded consistently higher without any significant pullbacks during the day. Hence it is not unreasonable to say that today’s rally in Nikkei 225 is purely based on the efforts of Nikkei 225 bulls alone, unassisted by anybody else. And the efforts of the bulls did payoff significantly – with price clearing the 14,000 ceiling at literally the last second of trade before Tokyo Stock Exchange closed.

Hourly Chart


Why the bullishness?

There isn’t any apparent reason for today’s rally, with the only plausible explanation being technical bulls wanting to fight back strongly following yesterday’s disappointment. Another plausible explanation could be the fact that Future prices did not really dip below the lows of 30th July, hence encouraging adventurous bulls to enter. One thing led to another, and price eventually broke the previous swing high of Tuesday, allowing for further acceleration towards 14,000. The slightly better than expected Chinese Manufacturing PMI also helped bulls to push prices higher (even though the numbers are highly suspicious).

It is reasonable to be unconvinced by this explanation. But if that is the case, perhaps we could see price falling like a brick eventually especially given the broad bearish momentum seen from the hourly chart.

Monthly Chart


However, Monthly Chart is actually much more bullish. The July candle has since turned green despite yesterday’s loss, due to the candle time being based on US, and as such enjoying the early Asian morning gains (as it is technically still July in US when that happened). It is unlikely that the Japanese traders are looking at this chart for any technical significance, and as such we shouldn’t really be using this July green candle as an argument for why Nikkei 225 was so bullish today. Nonetheless, the technicals of this chart is still sound. With 2 consecutive bullish candle following the red inverted hammer, we are currently in a good position to continue the long-term bull trend that has started since November 2012. However, prices should ideally break above the 14,450 in August to show real bullish intent for the rest of 2013. Entering early may certainly be risky due to the fact that today’s rally remain unexplained adequately, coupled with the fact that past 3 months have seen long tailed candles, suggesting that we may be hoodwinked into a sense of security even when price move in our desired direction. Conservative traders may hence wish to hold their horses and wait for another month, or at least a few days and see if the bullish narrative plays out before committing heavily.

More Links:
Gold Technicals – FOMC volatility not breaking sideways trend
USD/SGD Technicals – Supported by 1.27 Round Figure
GBP/USD – Drops Down Through 1.52 to Two Week Low

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Mingze Wu

Mingze Wu

Currency Analyst at Market Pulse
Based in Singapore, Mingze Wu focuses on trading strategies and technical and fundamental analysis of major currency pairs. He has extensive trading experience across different asset classes and is well-versed in global market fundamentals. In addition to contributing articles to MarketPulseFX, Mingze centers on forex and macro-economic trends impacting the Asia Pacific region.
Mingze Wu