Chart of the week: is Japan about to rise again?

6th September 2021 12:35

Our technical analysis expert takes a close look at the candles for Japan’s leading index, the Nikkei 225.

Asian stocks have been lagging the US for some months and nowhere is this more prominent than in Japan, where the Nikkei 225 index is off by 12% from its February all-time high (ATH). Meanwhile, the S&P has gained by 20% in this period.

It is generally thought that Japan has not handled the pandemic well and consumer sentiment is low (witness the local hostility to the Olympic Games). Combine that with the general sluggish economic performance and you have a recipe for a weaker stock market.

But with the change in leadership away from 'Abenomics' – and another one looming – has the scene been set for a renewed upswing in the land of the rising sun?

And remember, the Bank of Japan (BoJ) is still buying exchange-traded funds (ETFs) and Japanese Government Bonds (JGBs) hand over fist and are unlikely to ease off with sentiment so low. The new leadership is more likely to augment that programme with positive results for stocks.

Incidentally, UK investors have generally shied away from non-UK/US assets, but could expand their horizon to Asia where I believe Japan offers value at present. The Japan 225 index offers an ETF that is easily tradable.

So, why do I believe Japan is set to rise again now? Here is the long-term monthly chart where I identified a likely upside reversal a month ago:

Past performance is not a guide to future performance.

The market had descended right to test the major tramline of support and odds supported an upside reversal from that point.

Here is a close-up of recent action on the daily:

Past performance is not a guide to future performance.

On 20 August, the market bounced off the point where it met two major lines of support; first from the lower wedge line and then from the major lower tramline on the weekly. And by virtue of a momentum divergence at the low, it was able to rally very powerfully to begin wave 5 up.

Already it is up over 10% off the 20 August low. No doubt the strength of the rally was partly the result of a massive short squeeze of institutions who were kept off-guard by the 'shock' political developments. But it was well flagged by my earlier chart analysis – here it is in detail.

Past performance is not a guide to future performance.

Last week, I had a note on the Japan 225 in my video alerting viewers to this possibility that the trend had changed on 20 August.

This morning, the main target at the round number 30,000 level has been achieved.

Usually, there is some pause at least as a major round number target is hit. But if not, I have the next target around 31,100 in my sights. And after that, the old 1990 ATH at 39,000 heaves into view.

This promises to be a very exciting ride.

John Burford is the author of the definitive text on his trading method, Tramline Trading. He is also a freelance contributor and not a direct employee of interactive investor.

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