Nikkei 225 Index Analysis as a Dangerous Pattern Forms

Summary:
• The Nikkei 225 index has staged a strong bullish recovery in the past few weeks. It jumped to a high of ¥28,515

The Nikkei 225 index has staged a strong bullish recovery in the past few weeks. It jumped to a high of ¥28,515, which was the highest level since September 13. The NI225 index spiked by more than 11% from the lowest level in October and by 15% from the lowest point this year. YTD, the index has dropped by 2%, meaning it has underperformed the Nasdaq 100, which is down by over 20% this year.

Japan stocks rebound

The Nikkei 225 index has bounced back in the past few weeks as investors buy the relatively undervalued Japanese stocks. It has also rebounded because of the relatively weak Japanese yen. The USD/JPY pair jumped to an all-time high of 151.63, which was about 20% above where it started the year. While the Japanese yen has rebounded recently, it remains at an elevated level.

The Japanese yen weakened because of the actions of the Bank of Japan (BoJ). While most central banks have embarked on an aggressive rate hike program, the BoJ has been a holdout. It has maintained interest rates at a record low and continued buying bonds and mortgage-backed securities worth billions of dollars. 

A weaker Japanese yen is seen as a positive thing for many Nikkei 225 constituents such as Toyota and Nissan since it makes it cheaper for them to export. At the same time, since many of these firms do a lot of business internationally, a weak yen means that they are reporting positive fx impacts. However, a weaker Japanese yen has had a tough impact on Japanese importers.

A key Nikkei 225 index constituent that is under pressure is Softbank. The firm, which is the fifth biggest Japanese company by market cap, has reported billions in losses as tech stocks plunged. Still, Softbank stock price is up 11% this year. The worst-performing stocks in the index this year are Z Holdings, Rakuten, Recruit Holdings, and Sony. On the other hand, the top gainers are companies like Fujikura, Mitsubishi Heavy, Mitsubishi Motors, Mitsui, and Tokyo Electric.

Nikkei 225 forecast

The daily chart shows that the Nikkei 225 index has been in a strong bullish trend in the past few weeks. It has moved slightly above the important resistance level at ¥28,342, which was the highest level on June 10 and March 24. The index has also moved above the 25-day and 50-day moving averages while the Relative Strength Index (RSI) is nearing the overbought level. 

However, a closer look shows that the index has formed a rising wedge shown in black. In price action analysis, this pattern is usually a bearish sign. Therefore, the index will likely pullback in the next few days. If this happens, the key level to watch will be at ¥27,500. A move above the resistance level at ¥28600 will invalidate the bearish view.