Here’s Why the Nikkei 225 Index is in a Consolidation Mode

Summary:

In this article, we explain why the Nikkei 225 index has been going nowhere lately and why it will likely break out higher in the near term

The Nikkei 225 index is going nowhere. The blue-chip Japan index is trading at ¥29,685, which is a few points below its year-to-date high of ¥30,660. It has been in this range in the past three weeks. Still, it is one of the best performers this year, having gained by more than 10%.

What happened: Japan stocks have been taken a pause after they surged to the highest level in more than 30 years this year. This wavering has happened partly because of the automobile sector that is suffering from a major supply shortage of chips. This has affected some of the leading automakers like Mazda, Nissan, and Mitsubishi. This is notable since auto demand is soaring.

Also, the index has struggled because of the rising infections in Japan and the slow speed of vaccinations. Unlike other countries like the US and UK, Japan has only vaccinated less than 2% of its population, a shame for the third-biggest economy in the world.

The Nikkei 225 index has also struggled because of the overall strong Japanese yen. The currency has jumped by more than 2.25% in the past few days.

Today, the top movers in the Nikkei index are SUMCO, Yamata Holdings, Mitsui, and Tokuyama. On the other hand, the worst performers are Shiseido, ANA Holdings, and Toho.

Nikkei 225 technical outlook

The daily chart shows that the Nikkei 225 index has been between the support and resistance levels at ¥28,322 and ¥30,660 in the past few days. The index is along the 25-day moving average while the Average True Range (ATR) has dropped to the lowest level since February 12.

Therefore, in my view, the index will remain at the current range in the near term. The key levels to watch will be the support and resistance mentioned above. In my view, the index will ultimately breakout higher since this consolidation can be said to be a bullish flag.