Nikkei 225: Trading Higher Amidst Strong Bullish Sentiment

Japanese futures formed a trough around US midday yesterday, and since then it has been a one way direction up. Price had an initial hairy moment during Japan open with the underlying Nikkei 225 index trading lower, but the actual index never did tested the lows etched out by the Futures earlier, and stocks quickly recovered, only finding slight resistance in the form of the descending Channel Top, which was broken easily and sent price above 13,500. Currently price is testing the top end of consolidation range 13,500 – 13,770 which was formed back on the last day of May, with 13,770 itself the bottom of the higher consolidation range.

Hourly Chart

Why are prices moving higher? Perhaps the futures folks have gotten way ahead of themselves in the bearish correction. It is worth noting that future prices were trading lower during US hours when US stocks were rallying with Dow posting triple digits gains. Also, it is hard to say that overall bullish sentiment in stocks have evaporated considering that the US stock rally happened in spite of the weaker than expected ISM Manufacturing PMI, which came in at 49.0 versus an estimated 50.6, and the weakest since 2009 August. It is likely that the robust bullish sentiment helped pulled Nikkei 225 higher during Asian hours.

With European stocks trading higher (stoxx50 + 0.79%, DAX +0.77% and FTSE +0.55%) right now, and US Futures flat, there is no evidence that the bullish sentiment is gone, which may mean higher highs for N225 Futures tonight. Stochastic readings disagree though, with the stoch line flattening out and current reading levels close to the peak back on 28th May.

Monthly Chart

Monthly chart shows a very interesting development. Price was initially forming a bearish candle after the long tail shooting star bearish candle. However, with today’s recovery, the monthly chart has become a bullish hammer pattern, with the tail touching the 13,000 support which was an interim support back in early 2008. It will take something extraordinary to invalidate the bearish pressure exerted by the shooting star candle, but by trading above the 61.8% Fib which is also higher than the shooting star body will be good start. 14,500 will be another important resistance for price to clear on a monthly basis.

Fundamentally, Japanese stocks seem to be running on air. Despite what Prime Minister Abe said today, recovery signs in production, consumption and GDP growth remain weak, and there are signs of the negative impact of weak yen coming through, with Japanese food makers starting to complain that import prices are getting out of hand. Also, it is funny how Shinzo Abe and his cabinet basically dismissed the huge May decline as “unstable movements”, while saying that increase in share prices is a testament of Abeonomic’s effectiveness. It seems to be a case of choosing what they want to see, and hence assertions that Abenomics is working by these politicians should be taken with a huge pinch of salt. That is not saying that Japan economics will not recover in the future, as the rot in the economy is slowing down. Giving credit where credit is due, there is a future possibility where fundamentals will improve again, giving solid footing for Japanese stocks – but this is currently not the time.

With this in mind, current stock prices are certainly grossly inflated, and may tumble down quickly in June should current risk appetite evaporate for whatever reason. Also, longer term prospect for growth in stock prices becomes lower as optimism has already extended itself heavily, making future improvements in the economy a mere “catch up” rather than the impetus for further gains. In extreme scenarios, a “buy the rumor, sell the news” impact may even be seen, which makes the outlook for Japanese stocks even more bleak.