Nikkei 225: Trading Lower Despite Higher GDP Print

Japan’s GDP came in slightly higher than expected, with the final estimate for Q1 2013 standing at 1.0% vs 0.9% based on a previous estimate. This increase of 0.1% Q/Q resulted in a jump of 0.6% in the annualized figure, which now sits at 4.1% versus the 3.5% previous estimate. This 4.1% figure, happens to be the one that is being thrown around via newswires this morning, as various publications declare that “Abenomics” has helped Japan to achieve unprecedented gains in such a short time. Some even say that this morning’s rally in Nikkei 225 is due to the upgrade of GDP figure, and that the fear of full bearish reversal is wrong and premature.

Hourly Chart

Unfortunately, the truth couldn’t be much further. Yes it is true that Nikkei 225 did gap higher today, the underlying stocks is currently trading at +2.80% after closing below 13,000 on Friday. However, it is important to note that most of the gap can be attributed to the reversal in sentiment back during US trading hours as evident via Futures prices. In fact, when the GDP data is released, Nikkei 225 did not continue to rise, but rather stalled and traded lower. The rally that happened last Friday appears to be the result of a combination of technical pullback coupled with a strong showing in US stocks (S&P 500 +1.2% while Dow +1.28%), and has little to do with the supposed “huge” improvement in Japan GDP, which under closer scrutiny is simply a 0.1% actual increase.

From a technical perspective, the failure to push for higher highs formed an Evening Star bearish reversal pattern, which exposes the descending Channel Top again. It is also worth noting that price did not manage to break above the soft 13,500 interim support turned resistance, that has been in play back on 31st May and 4th-5th June. This, together with the Stochastic reading that is highly overbought, shows that price is potentially facing a bearish cycle fairly soon, and we could potentially see bearish acceleration back towards the Channel which may also break the 13,000 significant support/resistance.

Monthly Chart

From the Monthly Chart, we can see price successfully trading back up the 50.0% Fib. Nonetheless overall bearish bias remain. If June ends right now, current candlestick may not be the most bearish possible, but a case of an “evening star” remains (though admittedly a very weak one). The most bearish pattern would see current candle trading below the 50.0% Fib and preferably below the opening levels of April, but a weak evening star may suffice as price has failed to clear significant resistance in May, and ended up trading lower below the 61.8% Fib. Stochastic reading also agree with a bearish outlook, with both Stoch and Signal lines pushing below the 80.0 mark, adding weight to the case of a bearish reversal back towards 11,300.

Fundamentally, Japanese economy remains weak. GDP Deflator (measurement of inflation) continues to be negative, with current Quarter showing -1.1% versus previous quarter of -0.7%. Trade balance (BOP Basis) also came in much weaker than expected, coming in at -¥818.8B vs an estimated -¥729.9B. The non-reaction to the slightly better than expected GDP print is also a concern, underlining the bearish sentiment that is currently playing in spades. All in all, outlook of Nikkei 225 remains weak and certainly we’re not out of the woods yet, unlike what major newswires would like to have us believe.

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