Nikkei 225 – Crossing 14,000 but bearish pullback seen

Nikkei 225 crossed 14,000 for the first time in 5 years, jumping higher due to stronger employment data from US last Friday. However, instead of smiles and cheers from the Futures traders, bulls are faced with a potential bearish sell-off scenario even though the underlying stock index gained 2.75% (at the time of writing) from Friday’s close.

Why the gloom?

It seems that bulls trading stock futures have gotten way ahead of themselves. US NFP data was released way after Japan close, and the futures movement that pushed price all the way to 14,250 happened purely on the speculative actions of the bulls, and not supported by the underlying stock prices. Yesterday was also a bank holiday for Japan, hence there was no trading activity for the underlying, which put today’s trading session the first time stock and futures traders meet. Unfortunately, despite the fact that risk appetite remained buoyant (S&P 500 reached yet another new historical high yesterday, while Dow Jones Index remain flat), it is clear that physical stock traders’ valuation of their stock values are lower than what the Futures counterparts believe in. Today’s morning gap of “only” 381 points is not enough to meet the Futures valuation of above 14,200, resulting in a huge correction downwards for the Futures.

Hourly Chart

What does this tell us? Speculation action is rife in Nikkei 225 right now, and everybody is highly bullish, which resulted in such strong overvaluation.

The question that we need to ask is this – knowing that underlying pressure is on the bullish side, how far can current correction last? Also, another related question would be whether current rally will be sustainable in the long run considering that the main driver appears to be speculation only?

There are no right answers to these questions, but we can look at technicals and hopefully that may give us some better insights. Price is currently trading below the interim support around 14,190 and below the rising trendline. With no other point of reference for support between now and 14,000, we are forced to look at price potentially retracing all the way back to 14,000 before finding significant support. Stochastic line is still pointing downwards, suggesting that price may still be able to head lower, but readings are currently within the Oversold region, which makes headway beyond 14,000 unlikely.

With that being said, a full retracement back to 14,000 would suggest that all the bullish feel-good feeling post NFP numbers would have all but evaporated, something which is hard to accept considering that overall sentiment/speculative action remain bullish. Hence, it will not be surprising to see price managing to find support from now between 14,000, and subsequently pushing back up if speculating bulls have their way, resulting in a “fakeout” scenario.

Daily Chart

Daily Chart provide a strong cautionary tale. Price may form yet another Evening Star candlestick pattern if price manage to remain bearish after today’s trading session has ended. However, price has shown numerous failed Evening star patterns along the way ( 25th Apr, 21st Apr, 12th Apr, 4th Feb) and many other bearish reversal patterns along the way. Hindsight tell us that all of them ultimately failed. Given that current rising trendline remain in play, traders may wish to practice caution and not bet their house on any strong lasting bearish sell-off, even as Stoch readings remain firmly entrenched within the Overbought region.

Fundamentally, there isn’t any strong compelling reason why Japanese stocks are so high right now. The impact of Abenomics remain suspect looking at recent Japanese economic data, with sentiment and industrial productions levels remaining bearish. The argument that weakened yen is driving N225 higher has been invalidated now given that USD/JPY stubbornly refuse to break above 100.0, yet N225 has been pushing for newer highs constantly, forming a divergence between USD/JPY and N225. However, always remember that the market can stay irrational longer than all of us can be solvent, as such, trade at such irrational levels at your own risks.

More Links:
EUR/USD – Slips Back Under 1.31
AUD/USD – Struggling to Stay Within Reach of 1.03
GBP/USD – Takes a Breather Around 1.5550

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.