Nikkei 225 – Further upside potential towards 20,080/20,440

<p>Since the bursting of the Japanese asset (property) price bubble in the early 1990s, the Japanese stock market as represented by the widely-cited benchmark Nikkei […]</p>

Since the bursting of the Japanese asset (property) price bubble in the early 1990s, the Japanese stock market as represented by the widely-cited benchmark Nikkei 225 has plummeted by a horrendous decline of 80% from a high of 39260 printed on January 1990 to a low of 7606 seen in April 2003.

Even in the previous major bullish trend that occurred from 2003 to 2007 for most emerging and developed markets, Japan was not able to “enjoy the fruits” and underperformed against the rest of the world.

Since the low of 6995 printed in October 2008, the Nikkei 225 has soared by an astonishing 177% to record a high of 18865 seen in February 2015. This remarkable performance is driven primarily by Abenomics.

The big question in all traders’/investors’ minds right now is can this rally be sustainable? Will it falter just like it did after the 2003 to 2007 period?

I will answer this golden question from a technical analysis perspective.

Key elements

  • The Index has just broken out of a long-term bullish bottoming formation called “Double Bottom”, in place since April 2003. The exit potential of the “Double Bottom” targets the 29610 level (see monthly chart below).
  • The long-term MACD trend indicator has managed to flash a bullish crossover after a “flattish” environment since January 2014. This observation suggests that upside momentum is still supporting the current long-term bullish trend, in place since October 2008 (see monthly chart below).
  • The lower boundary of the intermediate-term ascending channel (in brown), in place since 14 January 2015, and the upward sloping 20-day Moving Average (in red) are acting as a support at 19100 (see daily chart below).
  • The 23.6% Fibonacci retracement from 14 January 2015 low to the current 24 March 2015 high also confluences at the 19100 support.
  • The intermediate-term RSI oscillator is overbought but without any bearish divergence (see daily chart below).
  • The next resistances at 20080 and 20440 are 0.618 and 0.764 Fibonacci projection levels from 14 January 2015 low to 10 March 2015 low respectively (see daily chart below).

Key levels (1 to 3 months)

Pivot (key support): 19100

Resistance: 20080 & 20440

Next support: 18500/18100

Conclusion

Technical elements remain positive and as long as the 19100 monthly pivotal support holds, the Nikkei 225 is likely to see a further potential upside movement to target 20080 before 20440.

On the other hand, failure to hold above 19100 may damage the intermediate term bullish trend for a deeper decline towards the next support at 18500/18100 (neckline of the “Double Bottom” bullish breakout).

Nikkei 225 April 2015 monthly chart
Nikkei 225 April 2015 daily chart

Both charts are from Advantage Trader & eSignal

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