Travelling Technicals with Global Indices: Nikkei 225

Among the world's top stock markets as measured by market capitalisation is the Tokyo Stock Exchange with 2292 listings, it certainly lives up to its hierarchical standing with plentiful multinational corporations having all started in Japan and expanded outwards, conquering new business landscapes and winning over global consumers with products that has seen them become some of the most trusted, reliable and technological brands of our time.

It's not difficult to understand why the Nikkei 225 has formed part of a common index following throughout the world. If one thinks of just a select few companies that can be found in their day to day lives that reside in the index you sense that they are the appropriate gauge for world economic outlook;

• Toyota
• Nissan
• Sony 
• Fujitsu
• Panasonic 
• Komatsu 
• Yamaha 

It's evident to see how Japanese products have influenced the way the global consumer utilises their purchases and in saying that has set the benchmark in terms of standard of quality that should be expected.

But as much as the Japanese businesses have successfully captured profits from their export endeavours, the pathway with which the Japanese economy is along has been troubled for the past two decades with a risk of continuing to deteriorate if long term solutions aren't found to pressing issues. One particular dilemma facing the Japanese is a crisis of having a shrinking population or put more plainly a situation where there are more old people than young people.

As a result the Japanese government is finding it extremely hard to tap into revenue sources that would produce sufficient taxation to fund an increasingly demanding fiscal budget that requires more priority on the health of the elderly and as such needs to tackle restructuring their economic activity that would be prosperous over the long term. Thus far that goal looks too distant for many to begin being hopeful of the future yet with every passing year the need to deliver is growing ever constant.

This is just one of the many problems facing the Asian nation but makes a worthy case study for other developed economies to pay attention too. We've seen parallel policy implementation when it comes to a monetary easing between the Bank of Japan and the European Central Bank which is seemingly causing the world to ponder what trajectory both these nations are on.

However because the generous helping of monetary easing has made the need to find suitable returns ever greater the Nikkei 225 index has seen a dollop of resilience coming through that's assisted the index to challenge long term resistance with potential to go higher.

Let's get down to the charts:

Quarterly

The chart we looking at has a considerable length of time spanning as far back as 1987 which would date the preceding rally before the asset price burst that has held financial markets back in Japan for over two decades. The highs made during the late 80's early 90s have never been registered again since the huge declines that sent it into a secular downtrend. 

That downtrend was completed in 2005 with an initial break out producing a good rally but falling short of the resistance level needed to see a resurgence of buyers joining the trend upwards. It seems as if the trouble started around the same time as the Financial Crisis and sent prices back down to the lows of 2003/04. But surprisingly prices were able to hold support steady without plunging further which would have reaffirmed the continuation of the downtrend. 

Prices remained subdued after the shock of the Financial Crisis which is something I found unfamiliar compared to other major indices that registered fresh lows then made a courageous effort to reach for the highs last seen at the peak. In this case there seemed to lack directional movement which would suggest a disconnect between this index and other major indices. 

In came Abenomics together with the BOJ on a crusade to rid Japan of the evils of deflation by putting together a string of stimulus measures that helped get the index moving once more in sight of the overhead resistance that had yet to be broken. 

However it must be mentioned again that another disconnect became known and that happened between the Japanese GDP growth rate and the Nikkei 225. Where the GDP growth delivered far below par performance, the Nikkei continued its flight to the top which begs the question, who's buying into the Japanese recovery story? 

It turns out that the amount of bonds available for the BOJ to buy isn't sufficient enough so Governor Haruhiko Kuroda found it necessary to buy Japanese equity ETFs that has caused the BOJ to own roughly 50% of all equity ETFs listed on Japan's stock market. 

Back to the aspects of the chart and we see that the resistance around 18 000 has been broken but subsequently fallen back below that level which shifts the risk into the hands of the buyers. If we assess the overall price action that has taken shape over the last 15 years it resembles that of a double bottom formation suggesting that we could've found a solid bottom. With the price having broken upwards activating this pattern with big potential. 

But with the price hovering below 18 000 it does leave traders a little skittish over the prospects of going higher. A general rule of thumb would be to say if the price were to close below 14 000 (roughly half the measured move) it would nullify the pattern. We saw a dramatic drop in the first quarter of this year but a strong bounce shows that buyers have strong interest at those levels.     

Weekly

The uptrend we spoke about earlier on is seen clearly on the weekly chart with a distinct topping pattern having formed, the Cup and Handle with a break to the downside. The progress of the move indicates that we've reached a level that hasn't satisfied the full target of the move which means there could be further downside before we see any resolve of the price.

Two scenarios could enact themselves in reaching the final target price that lies just below 14 000, a level we established to be critical in previous paragraphs. Either the price falls to reach the target and bounces strongly back to shield it from anymore technical damage or the price falls below 14 000 and becomes stuck underneath nullifying the quarterly Double Bottom pattern which would be a real nuisance had you been following it for the past 15 years!!!

Current market conditions don't bode well for a bullish case in this situation so it should be accepted that the bias lies to the downside however if the BOJ were to up its stimulus measure we could see a strong rally pursue but this is becoming unlikely with the markets sentiment around the use of such measures being frowned upon.