The Nikkei 225 gaped higher at the open this morning on the back of the stronger US equities close last Friday. However, the optimism evaporated quickly, with the day transforming into a one-way journey south.
It is worth noting that the price gap was not enough to overtake the previous week’s high of 13,513, highlighting the strong bearish sentiment above 13,500. This bearish sentiment can be extended below to 13,325, which was the ceiling early last week. Furthermore, price has also broken below the 13,150 support which was the ceiling back on 18th June and the floor as well at various points last week.
With the break of 13,150, an Adam/Adam double top has formed and this opens up the base of the first top – around 12,750 as a possible bearish target, with 13,000 providing some interim support. It is possible that 13,000 still manages to hold out even with a Double Top bearish pressure weighing, as Stochastic readings are currently hitting Oversold, and bears may find it harder to break 13,000 due to it being a psychological round number and in the midst of the consolidation zone from 18th June.
From a longer-term perspective, price is still sitting above 12,650 support but below 13,525. As long as 13,525 is unbroken, the decline from May will not be negated and the pressure to re-test 12,650 will continue to weigh on prices. However, if 12,650 manages to hold out, the longer-term uptrend will remain in play and this will help price to maintain a bullish outlook (at least from a technical basis) in the longer term.
A break of 12,650 may be disastrous for bulls as the breakout on the BOJ's 2013 stimulus plan would be invalidated. Given athe current lack of confidence in the BOJ and Abenomics, trading below post-BOJ announcement levels will be a huge morale deflator for even the staunchest of Abenomics supporter. We could potentially see strong bearish acceleration lower which could potentially allow bears to unwind all the gains of 2013.
Fundamentally, there aren’t any strong reasons for the Nikkei 225 to continue rallying. Recently, Japanese leaders have changed their tune slightly with regard to the slide that we’ve seen in Nikkei 225 – instead of saying Abenomics is still working and that the decline is “normal” and already “expected”, they chose to focus on the benefits to stocks and exports of a weak yen.
This is highly peculiar as Japan has previously promised the G20 that they will not focus on a weak currency to revitalize the economy, but rather the weak currency is simply “collateral damage” due to their own version of Quantitative Easing meant to boost the economy. Such statements reek of desperation, and suggest that Japanese leaders are currently at their wits end – which lends weight to the hypothesis that the Nikkei 225 may be unraveling quickly with no proper BOJ response should 12,650 break.
If this happens, we could potentially see the Nikkei going back to sub 10,000 levels and possibly even lower. With US stocks and European stocks climbing lower on global risk aversion, Kuroda et al will need all the luck they can get in order to avert the disaster.