Nikkei 225 Forecast: Japan Stocks Forms a Dead Cat Bounce

Summary:
• The Nikkei 225 index surged by more than 2.25% on Tuesday as global stocks rebounded. NI225 rose to a high of ¥26,225

The Nikkei 225 index surged by more than 2.25% on Tuesday as global stocks rebounded. NI225 rose to a high of ¥26,225, which was higher than Monday’s low of ¥25,525. It remains about 10% below the highest level this year, meaning that it has outperformed American peers like the Dow Jones, S&P 500, and the Nasdaq 100.

Japan stocks recover

The Nikkei 225 index bounced back on Monday as demand for global stocks rose. For example, futures tied to the Dow Jones and DAX index rose by more than 0.50%. This price action is mostly because of buying the dip mentality since equities dropped sharply last week. 

It is also because of the commitment by Bank of Japan’s Kuroda to work with the government to stabilize the Japanese yen. In a statement, Kuroda said that the current yen crash was undesirable and that the bank will work to stabilize it. It is still unclear how the BOJ will achieve that without hiking interest rates. In its meeting last week, the BOJ decided to leave rates unchanged, which was contrary to what other banks are doing.

A weaker Japanese yen has a mixed effect on the Nikkei 225 index. Both large and small companies are hurting from a weaker yen. For example, while large exporters are benefiting from more sales, they are being affected by the rising cost of raw material imports.

The best performing Nikkei 225 constituents were CyberAgent, Showa Denko, Rakuten, Kawasaki Heavy, and Mitsui Engineering. On the other hand, companies like Nichirei, Osaka Gas, Tokyo Gas, and Kao Corp were in the red.

Nikkei 225 forecast

In my last Nikkei forecast, I noted that the index had formed a bullish inverted head and shoulders pattern. This outlook did not work out as the index made a strong pullback following the highly hawkish Federal Reserve decision. The index has moved below the 25-day and 50-day moving averages on the daily chart. At the same time, the MACD has moved slightly below the neutral level.

Therefore, for now, the outlook for the Nikkei 225 index is bearish since this recovery seems like a dead cat bounce. As such, the next key support level to watch will be at ¥25,000. The invalidation point for this index is at ¥26,500.