Nikkei 225 Faces Critical Test as Correlated Stocks Eye Support

The Nikkei 225 is approaching a critical juncture, with three of its most closely correlated large-cap stocks nearing important technical support. While that could hint at a potential market low, weakness across the KOSPI and Nasdaq 100 suggests traders may need further confirmation before calling an end to the selloff.

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Correlated Stocks Point to a Potential Turning Point for the Nikkei 225

Three large-cap stocks are dominating the correlation dashboard with the Nikkei 225, making them worth monitoring for clues that the broader index may be nearing a low.

SoftBank (9984), Tokyo Electron (8035) and Fanuc (6954) have 20-day correlations above 0.90 and 10-day correlations of 0.79 or higher.

Source: LSEG

Of those three stocks, SoftBank and Fanuc are approaching support zones that could be reached within the next one to two trading days. Meanwhile, Tokyo Electron is approaching the 55,000 level, with another high-volume node around 52,000. Daily trading volumes are also declining, suggesting the selloff is being driven more by longs exiting positions than fresh short selling.

While these levels may not provide clear buying opportunities for bulls, they could serve as a warning for bears arriving late to the move.

Source: TSE, SGX, TradingView

KOSPI and Nasdaq 100 Hold the Key

With both the KOSPI and Nasdaq 100 under pressure, it may be premature to assume the Nikkei has already found its low. Nasdaq 100 futures have slipped below a high-volume node, and if risk sentiment continues to deteriorate, a move towards 60,000 cannot be ruled out.

Source: OSE, KRK, TradingView

For today, Nikkei traders should keep a close eye on the KOSPI. It has broken below its June low, although only marginally. A recovery into the close would strengthen the case that the Nikkei is also close to a low. Conversely, if bears remain in control and the KOSPI heads towards 60,000, the Nikkei could face further downside.

Ultimately, the KOSPI often leads the Nasdaq 100 and Nikkei during periods of heightened risk aversion. All three markets are close enough to the 60,000 level for a test of this key support to remain a realistic scenario. The bigger question is whether sentiment drives a direct move lower, or whether a relief rally emerges first before another leg down.

Source: OSE, Forex.com, TradingView

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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