Nikkei 225 – Pullback Seen After Unwarranted Rally

Japanese stocks traded higher today, closing just shy of a full percentage higher at 0.99%. This gain is part of the inexplicable shift in risk sentiment that drove all major Asian stock index higher this morning, an interesting move considering that Asian markets did not really respond that bullishly yesterday on stronger than expected Chinese GDP. Furthermore, US session took a holiday break yesterday, hence there is basically nothing that could have conceivably drove market higher this morning.

Hourly Chart


Therefore, it is no surprise that this morning’s rally failed to overcome the previous swing high seen on 16th Jan. Prices are currently retracing lower, trading back below the rising trendline once more. This suggest that the bearish break of the trendline seen on Monday remains in play, and we should be able to see further bearish momentum leading us below previous swing low around 15,550. Stochastic readings agree as a new bearish cycle signal has been given with both Stoch and Signal line pushing below the 80.0 level.

Weekly Chart


Daily chart remains bullish though, but a move towards 15,300 cannot be ruled out as it is possible that price retest the 15,300 level without jeopardizing current bullish bias. Therefore, it is unlikely that bulls would put up too much resistance between now to 15,300, and prices may actually stay close to 15,300 until 1-2 weeks later until the rising trendline start to exert bullish pressure once more. The likelihood of this scenario increases should price stay above 15,300 all the way while Stoch curve (which has just given a fresh bearish cycle signal) push lower towards Oversold and subsequently produce a bullish cycle signal in conjunction with the rebound off trendline.

Fundamentally, we need to realize that Japanese stocks are riding more on “feel good” sentiment rather than cold hard economic data. We are definitely still a far off from hitting the 2.0% inflation target that BOJ has set for themselves with 1 year left. Right now there are already rumours that BOJ may start to shift goal posts and give themselves a longer runway to hit the target after realizing that their job is far from down. Furthermore, it is even debatable whether hitting the 2% inflation target will really help Japanese economy, with key metrics such as Capex spending (indication of whether companies are optimistic/risk taking), industrial production and consumption figures remain on the soft side. Hence, traders who are paying a premium on stocks thinking that all the economic woes of Japan will be resolved in 1-2 years time may be disappointed, resulting in higher downside risks moving forward as traders have already priced in a bullish scenario.

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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