Japanese Stocks Futures opened higher today, in line with the rest of the Asian stocks as risk appetite rushed in due to Lawrence Summers withdrawal from the Fed Chairman contention. However, Future prices were not able to hold onto the gains, with prices quickly retreating below 14,500.
The reason for the decline is 2 fold. Firstly, we have Yen strengthening against the Greenback due to weakness seen in USD. This naturally dragged N225 prices lower as the strengthening of Yen will reduce the profitability of Japanese exporters. Secondly, 14,500 remains a strong resistance (seen in Monthly Chart) and it is reasonable to see offers triggered above the key line in the sand, sending prices back down lower.
From a technical perspective, the rally failed to test the highs of Sept 11th, and is a strong bearish indication. Currently price is retesting the 14,500 mark but price should preferably clear the 14,600 level before bullish momentum can continue. Despite this, short-term bias remains bullish as price continues to trade above the rising trendline which has been in play since September’s NFP Friday. Stochastic readings are also pointing higher, and suggest that we could see prices trading higher in the short-term but a breach of 14,600 may be out of reach with readings closing into the Overbought level. Furthermore, the past 3 peaks barely entered the Overbought region, suggesting that we may not see deep thrusts into the Overbought region this time round too, which impairs the likelihood of further bullish momentum when 80.0 level is breached.
However, should price does manage to hold above 14,500 at the end of this month, the likelihood of further movement higher increases, and a long-term move towards 18,000+ will be a plausible scenario. That being said, prices do need to push higher by the end of the month than simply close just above 14,500. This would allow Stochastic readings to form a proper trough where Stoch curve will cross the Signal line, giving us a stronger bullish signal – in line with what short-term chart suggest should we trade above 14,600.
Fundamentally, it seems that Tokyo Stock traders are not adversely affected by the impending Sales Tax hike, which will most likely be announced in the 1st week of October, as early as 1st October itself. Market has preferred to focus on the promise of more stimulus down the road in order to counteract the impact of the tax hike. Whether Kuroda will make good of the promise is still up in the air, as the BOJ Governor has not really announced anything, and instead all the promises have been made by various others such as Econ Minister Amari and the Tax Council in order to sweeten the tax hike deal. Hence there is a chance that prices may be depressed come October if Kuroda remain silent, and as such trading above 14,600 becomes all the more important as it provides buffer in case of short-term bearish shocks.
Also, as today is a Japanese bank holiday, it remains to be seen whether physical stock traders will view the Fed development as bullish as their Futures counterparts. Futures prices has been spotted a few times this year over-extending themselves, only to fall down sharply when physical traders turned out to be much more prudish. Hence, do not simply assume that it is going to be one way bullish street for Nikkei 225 this week even though risk appetite is strong.
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