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Is the Nikkei 225 topping out?

Are there dark clouds on the horizon for the Nikkei 225?

Nikkei 225 Source: Bloomberg

​​​Nikkei 225: one of the top performing global stock indices to date

​The Nikkei 225 ended the first half of the year narrowly behind the Nasdaq as foreign investors piled in but the beginning of the second half of the year looks less rosy.

​According to DailyFX strategist Richard Snow “the Nikkei has been one of the top performing equity indices in the world during the first half of 2023, bested only by the high-flying, tech heavy Nasdaq. In fact, the Nikkei ended 1H having risen 27.8%, only a little less than the Nasdaq at 29.86%.”

​Year-to-date Nikkei 225, Nasdaq 100 and Dow Jones Industrial Average comparison chart

Year-to-date Nikkei 225, Nasdaq 100 and Dow Jones Industrial Average comparison chart Source: Google Finance
Year-to-date Nikkei 225, Nasdaq 100 and Dow Jones Industrial Average comparison chart Source: Google Finance

​Ongoing monetary support from the new Bank of Japan (BoJ) Governor Kazuo Ueda and a weaker yen have made Japanese stocks an attractive proposition for fund managers.

​The ultra-lose monetary policy allows for ample access to credit while the yen depreciation improves company profitability and makes Japanese stocks cheaper to buy for foreign buyers.

​USD/JPY Daily Candlesticks Chart

USD/JPY daily Source: Tradingview
USD/JPY daily Source: Tradingview

The recent yen appreciation on news of broad participation in this year's wage increases has had a detrimental effect on the Nikkei 225 rally as it points to possible policy normalisation.

​Technical analysis outlook on the Nikkei 225

​The Nikkei 225 formed a double top on its weekly and daily charts with last week’s Bearish Engulfing pattern on the weekly chart being followed by this week’s slide, a clear technical sign of at least an interim top being formed.

​Nikkei 225 Weekly Candlestick Chart

Nikkei 225 Weekly Chart Source: Tradingview
Nikkei 225 Weekly Chart Source: Tradingview

​The March-to-June uptrend line at 31,145.30 represents a potential first downside target, followed by the double top downside target at 30,841.09 and the February and September 2021 highs at 30,795.78 to 30,714.52.

​The pattern downside target can be found by taking the distance from the 33,772.89 June peak to the 32,306.99 late-June low and project it lower from that low. This gives a target of 32,306.99 – 1,465.90 = 30,841.09.

​Nikkei 225 Daily Candlestick Chart

Nikkei 225 Daily chart Source: Tradingview
Nikkei 225 Daily chart Source: Tradingview

​On the way down the 55-day simple moving average (SMA) and 8 June low at 31,427.86 to 31,420.45 may offer short-term support.

​Only a currently not expected bullish reversal, rise and daily chart close above the recent highs at 33,762.81 to 33,772.89 would invalidate the bearish double top pattern which can be spotted better on the daily chart as it looks like an “M.”

This information has been prepared by IG, a trading name of IG Markets Ltd and IG Markets South Africa Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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