Chart of the day Nikkei 225 recovers from support as Japan general election looms

Short-term technical outlook on Nikkei 225 (Fri, 20 Oct 2017)

This coming Sunday, 22 October, Japan will hold its 48^th general election where latest poll from Mainichi Shimbun as at Monday, 16 October has indicated a potential landslide victory for Prime Minister Abe’s Liberal Democratic Party (projected to win 303 seats of the 465 seats available in the Lower House) over the new party, Party of Hope founded by Abe’s main rival, Tokyo Governor Koike and her coalition from the conservative wing of the Democratic Party.     

Since PM Abe called for a snap election on 25 September, the benchmark Nikkei 225 has soared by 5% till yesterday’s 19 Oct close. It has surged passed the 2015 swing high area of 20950/930 which was also a former major resistance in place since June 1997.

Thus, it seems that market has already priced in almost fully an “Abe’ victory where he will continue to push for new reforms under “Abenomics” with focus now on productivity and human resources development to counter Japan’s ageing population and drive up wages (positive for stock market) On the contrary, Abe has proposed a rise on the consumption tax to 10% from 8% in October 2019 to fund free education where such as raise may dampen personal consumption in the near term (negative for stock market).

Now, let us take a look at the Japan 225 Index (proxy for the Nikkei 225 futures) from a technical analysis perspective to decipher its trend and current key levels.    

Key technical elements

• The Japan 225 Index (proxy for the Nikkei 225 futures) has continued to evolve in an ascending channel in place since 08 September 2017 low. The Japan 225 Index was not spared in yesterday (19 Oct) global sell-off seen in the major stock indices where it decline by 1.4%. Interestingly, this drop has tested the lower boundary of the aforementioned ascending channel at 21200 before it reversed up and erased almost all its prior loss (see 4 hour chart).
• The 4 hour Stochastic oscillator has inched upwards and still has room (depicted by the blue box) for further potential upside before it reaches an extreme overbought level at the 96% level. These observations suggest that short-term upside momentum of price action remains intact.
• The next significant resistance stands at 21630/690 (Fibonacci projection cluster) follow by 21900/22000 next (upper boundary of the aforementioned ascending channel & Fibonacci projection cluster).
• The hourly Stochastic oscillator has started to reverse down from its overbought region and still has room for further potential downside before it reaches its oversold region. This observation highlights the risk of a minor pull-back to test its intermediate support at 21345 (minor swing of 20 Oct 2017 & minor ascending trendline from 19 Oct 2017 low).

Key Levels (1 to 3 days)

Intermediate support: 21345

Pivot (key support): 21200

Resistances: 21630/690 & 21900/22000

Next support: 20930 (medium-term pivot)

Conclusion

Therefore, as long as the 21200 key short-term pivotal support holds, the Japan 225 Index is likely to stage another potential bullish impulsive upleg to target the next resistance at 21630/690 and a break above 21690 may open up scope for further upside towards 21900/22000 next.

However, failure to hold above 21200 shall negative the current bullish tone to unleash a corrective decline towards the 20930 medium-term pivotal support (23.6% Fibonacci retracement of the on-going up move from 29 Aug 2017 low & former medium-term swing high areas of 24 Jun/11 Aug 2015).

Charts are from City Index Advantage TraderPro

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