Japanese Nikkei: On the Brink of a Bear Market

Nikkei, Top, ReversalAbout this time a month ago, the Nikkei 225 (Symbol: NKY; $-denominated futures: NKD) was galloping forward without slackening pace, even with a +60.5%, 7 consecutive month just behind it.   Japanese Prime Minister Abe’s package of radical fiscal reforms – widely referred to as Abenomics – paired with a QE program significantly augmented by the BOJ at the beginning of April was beginning to receive acclaim for producing tentative-but-promising results.  Those were times of peace and plenty.

Then May 23rd happened.

After pushing as high as 16020 in the previous session, NKD opened at 15725 that day and quickly pressed toward the previous day’s high, as far as 15975 (check out Sheldon Mcintyre’s analysis of the preceding move, published the day of the top on See It Market).  The drop that followed unfurled quickly, and by the end of the session the Nikkei’s leading contract closed down 5.8% to 14805 after stamping out a peak-to-trough drop of -8.3%.

The 7 sessions that followed have dropped the index an additional -12.9%.  All told, the Nikkei has toppled in a cumulative 9 day drop from May 22’s 16020 high to 13010 last, now off -18.7%.

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Did the Nikkei crash?  According to the common definition, not quite (the jury’s out on whether it is in the process of crashing).  But it’s close; the index is on brink of a bear market, commonly regarded -20% or more, top to bottom.

PM Abe, BOJ Governor Kuroda, Fin Min Aso and their lesser bureaucratic retinue have taken pains – instigated as much by equity market performance as extreme volatility in Japanese government bonds, or JGBs – to quell this adverse breakneck turn.  The market’s reception of their remarks is self-evident – stocks continue to dig a deeper hole.  Kuroda, in particular, has demonstrated a beginner’s ineptitude at that most necessary of Central Banker skills – perception management – reminiscent of Tim Geithner’s first address as US Treasury Secretary in February 2009.  In some backhanded way, that is an expression of thanks for Ben Bernanke.

The good news, in retrospect, is that Geithner’s stumbling confidence-killer of a speech sparked the capitulation leg of the October 2007-March 2009 drop. Could Kuroda’s minimally-competent murmurings be the beginning of the end of the way to a bottom for the Nikkei?

Maybe so.  The Japanese equity benchmark ended the month of May in fittingly pivotal spot, closing at 13495.  As it happens, that is exactly where the rising trend line runs that has characterized the rally begun at 8625 in November.  It’s no coincidence the Nikkei founds its way to this value at month-end.

If there is a rational level of support (thick white line below) anywhere between 8625 (low) and 16020 (high), this must be it.

Nikkei, Reversal, Top


But then: markets make a devious practice of frustrating rational expectations.

This chart is a relatively simple one, suggesting just one technical question: Will the Nikkei hold this line?

If not, the depicted Bump-and-Run Reversal Top pattern that has been in development since November is in-play and suggests still further downside: to at least 12500-600.  This brushes the top of what is the first major support area since 16020: March’s 500-point range from 12100-600.  Not only a 4% price buffer, this area represented the consolidation of the immense Abenomics-fueled anticipation built up November-March of a much more accommodative monetary policy out of the BOJ.  The BOJ delivered, and the market – rather than “selling the news” – duplicated (8625-12100, 12100-16020) its great expectations with what increasingly looks like a drunken hope-filled blowoff.

If we’re spinning plausible narratives as financial news media is so intent on doing, here’s one : from a sentimental perspective, the Nikkei has spent the last 9 sessions liquidating a “QE-as-monetary-panacea” premium.

Whether that is all of the premium is a far more challenging question.  If a 4000 point overshoot higher is any indication, there’s likely to be some excessive undercutting here.  On that basis: if this thick white rising trend line represents the baseline of sustainable Abenomics-era progress for the Nikkei, a break below it at 13450 (that was today) may well represent the beginning of the end of bottoming.

In other words, snapping this level is momentous.  Raw price action says it is a logical place for buyers to step in.  But, after such a drop, demand may remain pent-in as buyers decide discretion is the better part of valor, choosing against catching the knife as it comes down all-but-unchecked to the tune of -18.66% at last check.  Whoever makes that choice is part of the prudent, stay-in-the-game “don’t attempt a bottom-tick” crowd we all do well to emulate.  On the basis of how the rally proceeded, 12100-12600 (touching which would place the Nikkei in a bear market, by the way) is the first major area of support below.

Price may quick-turn to recover 13450 – keep this scenario in mind because to lose this trend line is overwhelmingly negative, and so entrenched long interest (and there’s a lot of it caught higher) will seek this outcome.  But if it doesn’t, March’s consolidative rectangle at 12100-12600 comes next.  As the chart above shows, horizontal support rungs further down come in rather neatly in 500 point increments….down the ladder (or the chute) back to 10500 and back to the beginning of the year.


Twitter:  @andrewunknown    @seeitmarket

No position in any of the securities mentioned at the time of publication.

Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.