Why should the bulls be dancing? Well, Nikkei 225 has just gained 1.37% on the first day of trading in September. That is certainly not shabby and worth a shout. If we look at Futures, the gains are even more spectacular – prices rallied from a low of 13,247 last Friday to 13,746 today, a whopping 500 points gain, equivalent to a climb of 3.77%. This is especially huge if we consider how bearish Nikkei 225 was looking just one trading day ago.
Hence this automatically begs the question – what is the driving force that resulted in Nikkei 225 soaring higher?
The first obvious answer will be the lack of Syrian war. Obama has decided to let Congress make the decision on whether US should intervene in Syria, which is likely to be rejected, or at the very least delayed significantly before actual action is meted out. This can be seen by an one time revaluation of Nikkei 225 prices on today’s open, with prices jumping higher more than 100 points. But that is not the only reason, for that only account for a fifth of the rally seen today. The main bulk of today’s gains did come when the physical Tokyo Stock Exchange was opened, with prices steadily increasing in prices instead of jumping higher, which is not the typical post event knee-jerk reaction. Hence this lead us to believe that there may be other factors in play beyond a bullish reaction to the easing of Syrian unrest.
However, if we survey the economic calendar today, we will be hard pressed to find any potential news release that could have illicit such a bullish sentiment. The only news in the docket today is the release of latest capital spending numbers, which came in at 0.0% vs an expected -2.1%. Capital spending excluding software grew 1.4% vs expected decline of 3.8%. That is wonderful but hardly a ground breaking revelation. It is also unlikely that the lack of war changed overall sentiment that much considering that Nikkei 225 actually traded lower consistently on Friday, when the likelihood of war has already declined due to UK pulling out of the war before it even started.
Therefore, we are left with 2 other events that occurred over the weekend. First we have China’s manufacturing PMI which came in stronger than expected, and then we have the Japanese Sales Tax Panel saying that it’s ok for a sales hike, but more stimulus is needed. Perhaps it is this call for more stimulus that changed the sentiment of traders, as this is the first time we have a Governmental office calling for more stimulus, beyond the usual dross of non-committal answers from various BOJ members, Economic Minister Amari and Finance Minister Aso.
From a technical perspective though, today’s rally still have a long way to go in order to push a bullish mandate through. Price would need to clear the 61.8% Fib level at the bare minimum and preferably above 14,500 before we can talk about a longer term push towards 15,500 and above. It is likely that Stochastic readings will be pointing higher then, and preferably break the 80.0 level, which will be key to signal a return to the bullish momentum that we’ve seen since November 2012.
Short-term wise, price is attempting to move back into the rising Channel, 13,760 adding additional bearish pressure against a break. Stochastic readings favors a move lower with readings already extremely Overbought, but a bearish cycle signal has yet form, and hence traders should not be hasty into assuming that price will simply move lower especially given that we may have a fundamental shift in long-term sentiment in our hands. A break below 13,650 is prefered to open up a move back towards the 13,200+, with 13,550 providing interim support. This will most likely result in Stoch readings pushing below 80.0 for a proper bearish signal to add bearish conviction. On the bullish front, should price break 13,760, we may see some slight acceleration towards Channel Top with the peak of last week broken.
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