Nikkei 225: Stuck In A Range But Downside Pressure Builds

Summary:

With the cash market closed for Children's Day, futures are signaling a tough 4-day week may lie ahead for the Nikkei 225.

With the cash market closed for Children’s Day, futures are signaling a tough 4-day week may lie ahead for the Nikkei 225.

In my report last week I looked at the Nikkei 225 and asked the question, how long will it remain rangebound?

Today, i think we may have the answer.

As most of the nation celebrates the National holiday, traders will instead be closely monitoring the Nikkei 225 futures contract to predict what awaits them tomorrow morning. The Nikkei 225 futures are currently -282 points at 28,812 and 1% lower. This indicates the market may face a test of key support as trading commences tomorrow.

Two new developments have materialised over the last 24 hours that could provide a catalyst for the Nikkei 225 to break down, out of its recent range.

Firstly, investors were reminded that Interest rates can go up as well as down. Although most market participates have not been around long enough to see this (myself not included). Treasury secretary Yellen fired a shoot across the market’s boughs with yesterdays statement:

“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat”.

This rattled growth stocks in particular, which have become accustomed to ultra-loose monetary policy, sending the Nasdaq sharply lower on the day.

Energy Costs Increase

Secondly, the American Institute of Petroleum’s (API) inventory data signaled increasing demand for energy products.

For most, that would be viewed as good news. However, as the world’s 4th largest net-importer of crude oil, Japan will not wish to see energy costs increase at too fast a rate. This would likely be net-negative for the Nikkei 225. A material rise in energy costs would hamper the country’s economic recovery.

Many areas around the capital Tokyo are in the midst of their third state of emergency, we wonder if the Nikkei 225 price can absorb the negative tone in sentiment.

Nikkei 225 Technical Outlook

With futures pointing lower, a test of key support is likely this week. The price is fast-approaching three levels we view as crucial support.

Below the current level of 28,813, we have the 100-Day Moving Average at 28,667. Followed by horizontal support at 28,437. Next is the ascending trendline major support level at 28,390.

I expect the Nikkei 225 price to test lower this week, should we see a failure to hold these key support levels, the next target on the downside is the 1st of February low at 25,6505.

The negative outlook becomes invalid, should the Nikkei 225 close above the 50-Day Moving Average at 29,428.