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The Japanese market looks a touch oversold at present and the prospect of short covering is increasing. Still, price action is certainly bearish and the close below 14,000 increases the risk that we see a protracted move.
As you can see from the weekly chart, the index has closed below the neckline of the multi-month head and shoulders pattern at 14,135. I will be looking for a 2% move higher to sell into, although there is also strong resistance on the hourly charts around 14,200.
A rejection of the former neckline would certainly be bearish, with the head and shoulders pattern targeting a much deeper correction to 11,500 over the medium-term.
On the daily chart both stochastics and MACD are at levels which suggest rallies should be contained within a bearish trend, throwing weight behind my call to sell a rally in this index.
Of course we need to take a view on USD/JPY given the positive impact a weaker JPY has on its exporters and USD/JPY is right on key support at 101.55. A close below this trend support could see the pair move down to the February low of 100.75.
The BoJ failed last week to provide hints of future easing that many were positioned for. As a result traders have had to re-position portfolios accordingly, with short JPY/long Nikkei trades being cut back. The hawkish stance from the BoJ seems to have perplexed a few economists and traders given what we saw from the recent TANKAN report, which in turn should cap any rallies in USD/JPY.
Keep an eye also on developments in both the S&P 500, but also how tensions in the Ukraine this week play out. If we see a realistic chance of civil war in the Ukraine, with Russia looking to assist pro-Russians in the east, then the JPY will find good buyers and thus the Japan 225 will find sellers.