Nikkei 225 – Improvement In Risk Appetite Alone Not Enough For Long-Term Gains

Japanese Stocks rebounded higher in the past few days, lifted by improvements in global risk appetite led by the recovery in US stocks. Prices have climbed from a recent low of 13,908 to current high of 14,562, a move of more than 650 points (4.7%) peak to trough in the span of  3 trading days. However, it should be noted that this rally has nothing to do with any fundamental improvement in Japanese economy. As such, one wonders if this recovery is sustainable in the long run.

Daily Chart

Looking at price action on the Daily Chart, this question becomes all the more pertinent as we’ve seen similar bullish pullback/correction ever since the decline started on the first day of Jan trading. Without breaking the 14,850 resistance, it is hard to regard current bull run as anything beyond a temporary pullback, and a move back towards 1,3850 floor becomes more likely. Even though Stochastic indicator is showing a bullish cycle signal right now, the bullish potential of current move remains shrouded in doubt as we have resistance in the form of descending trendline and round figure resistance 15,000 hanging just overhead. Hence, it is not unreasonable to think that a fundamental shift in Japan’s economic fortunes will be needed to revitalize the possibility of a long-term bullish push.

In this regard, we are not seeing any significant changes, and if latest Current Account data released today is anything to go by, the economy appears to be weakening in fact. December Current Account showed a record deficit yet again, widening the gap seen on November 2013. Consumer confidence index has also fallen from 41.3 to 40.5 versus 42.0 expected, while Eco Watchers Survey for both Current and Outlook have both fallen. Bankruptcies have decline by 7.5% Y/Y, but the rate of decline has shrunk significantly from previous month’s -15.7%. The same could be said about housing loans, which grew 2.9% Y/Y but has slowed slightly from previous quarter’s 3.0%.

One important factor to take note is that Nikkei 225 has rallied to recent high because of Shinzo Abe’s Abenomics stimulus plan. As such, we need to set the expectation benchmark higher as market has already given premium to stock prices expecting the economy to be better. Hence, we need to see the economy growth surprising us even more beyond what has already been achieve in order to see long-term sustained gains for Nikkei 225, and certainly latest data is falling short.

Hourly Chart

This doesn’t mean price cannot go up higher in the short-term though. Bullish momentum continue to look strong with prices still trading within the rising channel. Even though Channel Bottom should have opened up as the immediate favored target, price appears to be staying above 14,600 nicely which opens up a potential move towards 14,800. Stochastic readings have given us a bearish cycle signal but even that looks likely to be invalidated given that Stoch and Signal lines are pointing higher and will re-enter the Overbought region soon enough. As such, it will be dangerous to simply short right now if one wants to fade the rally that appears to be not fundamentally supported. Instead, conservative traders may wish to seek confirmation the short-term bullish momentum has broken down before committing.

More Links:
WTI Crude – Risk of Pullback High As Fundamental Reason For Gains Weak
AUD/USD – Resistance Level at 0.90 Stands Tall
EUR/USD – Eases Away from Resistance at 1.3650

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.