Nikkei 225 price slides 3.3% as Asia digests FED's new path

Summary:

The Nikkei 225 price suffered a brutal setback, losing almost 1000 points. The FED bombshell sent shockwaves worldwide, forcing Asian indices sharply lower.

The Nikkei 225 price suffered a brutal setback, losing almost 1000 points. The FED bombshell sent shockwaves worldwide, forcing Asian indices sharply lower.

The Nikkei 225 is last at 28,010.93, down 953.15 (-3.29%).

Following a hawkish tone from fed chair Powell follow9ing last week’s FOMC meeting, Asian shares have started the week firmly on the backfoot.

The selling was indiscriminate across sectors, with only one stock in the index managing to finish in the green.

However, a positive spin was put on things by Shuji Housi at Daiwa securities who insisted, “The Japanese market is reacting too much. First of all, rate hikes are signs of an economic recovery,”.

For sure, there is some logic in that argument. However, one must remember that low interest rates have provided the rocket fuel for the meteoric rally of the last year.

Ahead of last week’s FOMC, the Nikkei 225 price had been close to breaking out of a descending price channel. However, realizing that the U.S may embark on a tightening cycle ahead of schedule was more than enough to derail the rally.

If Jerome Powell’s testimony spooked investors, FED member Bullard dealt a fatal blow when he revealed that rates might start to move higher as early as next year.

This was too much to take for markets that have ridden the easy money train higher over the last year. Investors were quick to book profits, sending the Dow Jones Industrial Average down 600 points and taking the Nikkei 225 along for the ride.

Nikkei Technical outlook

The daily chart shows that the Nikkei 225 price is below 50 and 100-day moving averages. Furthermore, the 50 DMA has completed a bearish crossover of the 100 and indicates momentum sits firmly with the bears.

Additional downside targets can be seen at the 200 DMA at 27,132. This should be considered a line in the sand for longs, and a failure to maintain this level could prove perilous for the index.

However, should the Nikkei 225 penetrate the 200 DMA, it will soon face the next noteworthy area of support?

A clear descending wedge pattern has capped prices at the top end of the range. The parallel trend channel has also been a good level of support at its lower end. This supportive trend line is now visible at 26,800. And may offer some respite for bulls should the 200 DMA give way.

Furthermore, this supportive trend aligns with a series of previous multi-years highs from December 2020.

On this basis, I will break from convention and suggest this may be an even more crucial area of support than the 200 DMA. For now, the path of least resistance is surely lower. However, should the Nikkei 225 price reverse higher and above the trend line resistance at 29,500, my immediate negative outlook would be redundant.