nikkei 225 sold off but right above medium term pivotal support of 16600 for a potential rebound 182

Daily Outlook, Tuesday 16 Aug 2016

(Click to enlarge charts)

What happened earlier/yesterday

The Japan 225 Index (proxy for the Nikkei 225) has staged a push up to retest the 16930 short-term range top that has capped the recent up move since 21 June 2016 high

Yesterday’s weaker than expected Q2 GDP growth of 0.2% y/y versus a consensus of 0.7% y/y has failed to cause a significant impact on the Nikkei 225.  Interestingly, the Nikkei 225 has started to sell off heavily this morning, 16 August as it shed 1.7% from yesterday’s high which has made it the current worst performer in the Asian region for today.

The main catalyst is for the current decline seen in the Nikkei 225 is triggered by renewed weakness seen in USD/JPY as it has breached below a short-term support of 100.60. Let’s us take a look at the key short-term technical elements of the Nikkei 225.

Key elements

• Even though, the current short-term decline seen in the Index has appeared to be horrendous but its current price action is now right above our predefined medium-term pivotal support of 16600 as our per highlighted in our latest weekly technical outlook/strategy published yesterday (click here for a recap).  The 16600 is considered a potential inflection level where the Index may shape a recovery based on a confluence of technical elements as highlighted in our weekly outlook.
• Current reading seen in the shorter-term (1 hour) Stochastic oscillator has reinforced the potential recovery scenario above the aforementioned 16600 support. The 1 hour Stochastic oscillator has flashed a bullish divergence signal at its extreme oversold level which suggests that the downside momentum of the current decline has started to abate.  
• The current weakness seen in the USD/JPY has lead it back to hover right above the Brexit’s low which is also the key long-term pivotal support zone  of 100.00/99.00 as seen on the weekly chart.  In conjunction, the weekly RSI oscillator is showing limited downside potential as it is coming close to an extreme oversold level.   Based on intermarket analysis, the movement of the Nikkei 225 tends to have a direct correlation with the USD/JPY. Therefore as long as the key 100.00/99.0 support holds on the USD/JPY, the Nikkei 225 may still shape a potential recovery at this juncture.

Key levels (1 to 3 days)

Pivot (key support): 16600 (medium-term)

Resistance: 16930 & 17200/240

Next support: 16280/150

Conclusion

Maintain bullish bias for a potential recovery.  As long as the 16600 medium-term pivotal support holds, the Index is likely to see a potential rebound to retest the minor swing high of 16930. A break above 16930 may add impetus for a further upside movement to target the next resistance at 17200/240 (Fibonacci cluster & medium-term swing high area of 31 May 2016).

However, a clear break below 16600 (daily close) is likely to invalidate the preferred bullish bias for a deeper pull-back towards the next support at 16280/150 (lower boundary of the medium-term ascending channel in place since 24 June 2016 low, medium-term swing low area of 04 August 2016 & the 61.8% Fibonacci retracement of the recent rally from 04 August 2016 low to yesterday’s high of 16944.

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