Rollercoaster Nikkei could offer reward

Price at time of writing – 12,975.

Japan's Nikkei has given us a rollercoaster ride this year, behaving in a way more akin to a fledgling emerging market.

Nonetheless, it is time we had another look to determine whether a trading opportunity is presenting. For the record, my last update on the Nikkei was on 12 March 2012, where I called the index a buy at 9960 - with a target price of 12,585. It took 12 months, but this target was achieved in March 2013.

My 2012 target of 12,585 was based on the fact that this is the point on the chart where the G2 line has been positioned for many years. The G2 is calculated as 50% of the all-time high and the all-time low, and is second only to the G1 in terms of Gann-theory importance.

When analysing Japan, all things need to be kept in perspective. In Japan there are working adults in their mid-twenties who have known nothing but falling prices for their entire lives. The country has experienced only a falling stock market for 23 years - and that is a lifetime for these young people. It is little wonder that a savings attitude has become endemic in the population, drummed into everyone from an early age. We should not expect, therefore, that recent aggressive policies designed to end this deflationary era are going to change embedded thoughts overnight. In my view, this year's rampant rally beyond 12,585 was simply the market herd getting ahead of itself.

The new administration (in conjunction with an obedient Bank of Japan) will not give up, however, and the recent correction back to the G2 level has provided an opportunity. So long as 12,585 holds firm, Japanese equities can rise again. It might be a volatile ride, but the potential rewards may be ample compensation for an occasional sleepless night. 

Recommendation: Buy. Target 15,520. Stop-losses can be triggered on momentum below 11,500.

Japan Nikkei chart

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