NIKKEI225 Backs Down from Last Week’s Gains

Japanese stocks retreat from Friday’s recent high following global stocks’ pause in the recent rally.

Monday brings little in macro news and the NIKKEI225 drops 0.87% on the day as investors contemplate the length of the recent rally. Overnight we got Manufacturing PMI for Japan, the consensus of 49.5 was just beaten, pulling a number of 49.8.

The number is a sharp increase over last month’s reading of 49.1, but still below 50, which signal expansion in activity. The market also received data for Capital Spending, investments made by corporations.

Data showed an increase of 7.4% compared to last month’s 6.8% but fell short of forecasts of 9.9%. The market didn’t see enough proof of economic expansion and the profit taking took over the quiet start to the week.

Investors are riding the AI-Tech driven rally, however, the NAS100 has lost 1.5% over the past 6 trading sessions. In the background, we still have the recent comments for BoJ governor Ueda stating that rate hikes will continue.

We may see the scenario where positive economic news, like expanding activity and jobs growth, will cause volatility as investors perceive a greater likelihood of higher rates.

Technical View

The day chart for the NIKKEI225 above shows a bear market undergoing a major correction. The last bullish leg that has taken the index from 30,746 to current levels of 38,803. The market is now finding resistance from the Ichimoku cloud and the level of 39,447 (purple line).

The market recently formed a rectangle (yellow area) with yesterday’s candle showing a breakout to upside. However, the pattern has occurred close to the cloud and the resistance of a previous high (purple line).

I see a break above the cloud as technically improbable, although the chances increase over the next 5 sessions where the cloud is thin. The most likely scenario is a side ways market, with the top trapped by the cloud and the low supported by a previous support of 37,599 (red line).