*** Please note: this will be my last post until after my week-long holiday. I will be back on 2nd June ***
The Nikkei has risen for a third consecutive day with the futures extending their gains ahead of the long holiday weekend in the UK and US, tracking the USD/JPY higher. My colleague Matt Weller pointed out the strong correlation between the two assets on Wednesday and highlighted a slight divergence in their relative performances recently. Matt argued that the recent underperformance of the Nikkei may cause the USD/JPY to ease back towards 99.00, but also warned against just looking at the inter-market analysis when predicting direction for an asset.
But with the Nikkei bouncing back recently, the USD/JPY may have found a bottom, too. That’s unless of course both assets fail to break some major resistance levels that they are currently testing/approaching.
Firstly, let’s take a look at the daily chart of the Nikkei index. As can be seen below, the Japanese benchmark index has again bounced off the key 13850-14000 support area just like it did in the previous occurrences in April, February and November. The lower end of this range also corresponds with the 61.8% Fibonacci retracement up move from June 2013 low and this makes this area even more important.
Figure 1:
But each time the Nikkei has bounced here, the correspondingly rally has been shallower. In other words, a potential descending triangle pattern may be on the cards, which is bearish. However there is a good chance the pattern may become violated i.e. by a potential break above the bearish trend that has been in place since the start of the year. Not only has the index broken a separate bearish trendline, but the RSI has also taken out its own corresponding trend. These are leading indications, suggesting that the underlying Nikkei index may soon stage a break out, too.
If the index does break higher then the next immediate potential targets to watch are as follows:
- 14645 – the April high
- 14720 – the 200-day SMA
- 14800 – 38.2% Fibonacci level of the down move from the January 2014 peak
Beyond these levels are some longer-term resistance areas which are also worth a mention for now:
- 15000 – psychological level
- 15095 – 50% retracement
- 15400 – 61.8% and previous support and resistance.
Meanwhile the USD/JPY has defended the key 100.85-101.10 support area like it did earlier in the year. On top of this, the FX pair has managed to hold its own above the 200-day SMA (i.e. on a daily closing basis) yet again. In the past, the test of the 200-day SMA has preceded significant rallies, most notably in November of last year. Although past price action is not always a reliable indicator about the future, this could turn out to be another significant bullish development.
But for confirmation, the USD/JPY would need to at least break the first resistance area which is fast approaching, namely 102.00/20. This area is where a bearish trend line converges with the 50-day SMA and also a bearish trend line. There’s potentially a lot of stop buy orders sitting above last week’s high of 102.35/7 and this month’s peak of 103.00/2. If these orders are tripped, we may see a short-squeeze and this could cause sentiment to change dramatically. However if the rally falters around these levels then a revisit of the 200-day SMA (currently at 101.27) or support at 101.10 followed by 100.85 could be on the cards for next week. That could also be a bearish development for the Nikkei index.
Figure 2:
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