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Will the Land of the Rising Sun Keep Going Up?

On Thursday this past week Japan’s Tokyo based Nikkei Stock Index (NIKK) broke out to new highs after repeated tests of resistance at 23,000 since November 2017.

Since last fall, the buyers began to step in and bid up NIKK and its constituents more aggressively until it finally coiled between 22,750 and 23,000 before its breakout. The price action since November 2017 was clearly constructive in setting up for a bullish breakout as each time price was sold lower the bids came in more quickly as the consolidation evolved.

In addition to the strong price action NIKK printed an overbought reading on its daily Relative Strength Index (RSI). During an uptrend it is positive to see an overbought reading in RSI as this confirms the move in price. In other words, the expansion in price to new highs is being confirmed by RSI reaching the high of its range as well. RSI measures internal price strength and is a reliable tool for evaluating the validity of price behavior.

On top of the expansion in RSI, NIKK closed above its upper band of its Bollinger Bands which is evidence of a strong impending move. Bollinger bands help to identify trading ranges by creating upper and lower bands at plus and minus two standard deviations in price over the last 20 trading days, respectively. These bands are then plotted relative to a 20-day Simple Moving Average (20SMA) of price.

Standard deviation is a commonly used measure of price volatility. The bands mathematically narrow when the standard deviation declines and expand when standard deviation increases. When the bands compress together, like they did since November of 2017 in NIKK, it represents a market with declining volatility. Ultimately, low volatility will not last and either a move higher or lower will occur.


Higher Time Frame

Reviewing the next higher time frame by using the weekly chart shows constructive price action too.

Since the summer of 2016 NIKK has built a series of higher highs and higher lows, referred to as an uptrend. Inevitable periods of consolidation witnessed the price pull back to its 40 week Simple Moving Average or roughly its 200-day Simple Moving Average (200SMA). This moving average is used to determine the long-term trend. When price is above the 200SMA and finds support at this moving average it provides positive feedback for the sustainability of the existing uptrend.

Also, since October 2017 NIKK has posted overbought readings on its weekly RSI which is a sign of strength for the long-term trend. The breakout this week is clearly displayed on the chart below and implies more follow through may occur.


Taking a look at one order of magnitude higher, the monthly chart shows a healthy long-term uptrend. The breakout this week is a continuation of the major breakout that occurred in October 2017 when NIKK closed over 21,000 and cleared previous resistance from 2015.

Accordingly, the recent breakout may not carry as much weight as the 2017 breakout out since market participants eagerly bid up price as it accelerated over a previous psychological barrier at 21,000, whereas now price is moving at cruising speed.

Nonetheless, the breakout over 23,000 implores traders and investors to stay long until there are no more signs of a bull market in NIKK.


As always, please contact me with any comments or questions. Thanks for reading!

John


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