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Nikkei225 - Land of the Rising Sun

Is the "lost decades" over for Japan stock market?

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 176% to record a high of 19778 seen in last month, February 2015. This remarkable performance is driven primarily by Abenomics.

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

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

Wisdom Tree Japan Hedged Equity Fund (DXJ)/ iShares MSCI All Country World Ex. U.S. (ACWX) Ratio

Wisdom Tree Japan Hedged Equity Fund (DXJ) / iShares MSCI Asia ex Japan (AAXJ) Ratio

Wisdom Tree Japan Hedged Equity Fund (DXJ) /S&P 500 (SPY) Ratio

The above highlighted charts are "Relative Strength Charts" where we can have a gauge whether the Japan stock market is outperforming, underperforming or neutral against the targeted benchmark (denominator).

I will use the Wisdom Tree Japan Hedged Equity Fund ETF (exchange traded fund) to represent the Japan stock market as this ETF tracks large caps Japanese equities and implements currency hedging against the movement of the Japanese yen (JPY). Therefore, it will be a better gauge of performance after "stripping out" the on-going weakness seen in JPY when compared against the various benchmark indices that are denominated in USD.

The first two ratios' technical elements have indicated clear on-going outperformance against the MSCI All Country World Ex. U.S. and MSCI Asia ex Japan respectively.

Even though the ratio that uses the U.S. S&P 500 as a benchmark is still stuck in a range since September 2012, technical elements have started to improve as the ratio has managed to surpass the 20/50-week Moving Averages and the RSI momentum oscillator remains bullish above its support.

Nikkei 225

Key elements of Nikkei 225

  • 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).
  • The 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).
  • The upward sloping 20-month Moving Average is supporting the Index at 16530 (see monthly chart).
  • The pull-back support (in dotted purple) of the former multi-month ascending range configuration in place since May 2013 is also at around 16530 (see weekly chart).
  • The upward sloping 20-week Moving Average is supporting the Index at 18300 (see weekly chart).
  • Based on Elliot Wave principle, the Index is in the midst of a bullish (impulsive) wave III configuration with a potential projection target set at 21690 (Fibonacci projection cluster) (see weekly chart).

Key levels of Nikkei 225 (3 to 6 months)

Intermediate support: 18300/18100
Pivot (key support): 16530
Resistance: 20710/20850 & 21690
Next support: 14500

Conclusion

From a technical analysis point of view, the Nikkei 225 may have already seen its major bottom in October 2008 and it is in the midst of the "infancy" stage of a potential secular bullish trend.

Technical elements suggest that the Index may see a multi-week pull-back/consolidation below the 20710/20850 intermediate resistance towards the intermediate support at 18300/18100 with a maximum limit set at the 16530 monthly pivotal support. Thereafter, it is likely to resume its multi-month bullish trend to target 21690.

However, failure to hold above 16530 may damage the on-going multi-month bullish trend for correction towards the next support at 14500.

Charts are from eSignal

Disclaimer

The information contained in this material is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs. All queries regarding the contents of this material are to be directed to City Index Asia Pte Ltd.

 

kelvin_wong
Kelvin Wong, CFTe

Chief Technical Strategist (Asia), City Index

Kelvin is professional technical analyst with extensive experience in stock indices, equities and foreign exchange. Kelvin employs a combination of fundamental and technical analysis and specialises in utilising Elliot Wave and Fibonacci analysis to pin point potential reversal levels in the financial market. Prior to joining City Index, Kelvin has traded actively and provided investment advisory for institutional traders/investors such as Deutsche Bank, Credit Suisse, ANZ and Goldman Sachs. He has also conducted technical analysis related trading workshops and seminars for thousands of private traders in Singapore and Malaysia.