- As the sun set on Monday, 5 August, a significant sell-off in the Nikkei 225 hinted at a potential bullish reversal, marking a key inflection point after four weeks of decline.
- A resurgence in the Citigroup Economic Surprise Index for Japan on the same day suggested a positive upswing in macro data, paving the way for improved market conditions.
- The percentage of Nikkei 225 component stocks trading above their 200-day moving averages reached a historic low, indicating a possible bearish capitulation.
- Investors are advised to keep a keen eye on the major support level of 30,460 in the Nikkei 225.
This analysis serves as a sequel to the earlier report titled “Nikkei 225: Bullish breakout with improved market breadth” released on 27 June 2024.
Since the previous publication, the Nikkei 225 managed to rally as anticipated, touching a new all-time high of 42,427 on 11 July 2024, just below the lower range of the 42,600/43,400 resistance zone.
Recent weeks, however, saw the Nikkei 225 succumb to intense bearish pressures fueled by various adverse events, particularly disruptions in risk-on-carry trade strategies due to systemic funds flow positioning.
The dramatic 12.40% plunge on 5 August marked the worst single-day performance since the infamous “Black Monday” crash of October 1987.
The Nikkei 225 recorded a 4-week drawdown of -26.60% from the week of 8 July to 13 August, the steepest decline since the onset of the Covid-19 pandemic.
Interestingly, three key factors hint at a potential bullish reversal point triggered by the climactic sell-off on Monday.
Rejuvenation in Japanese Fundamentals
Fig 1: Japan Citigroup Economic Surprise Index as of 5 Aug 2024 (Source: MacroMicro)
The Citigroup Economic Surprise Index for Japan bounced back to a positive 1.60 on 5 August, indicating a potential catalyst to bolster the Nikkei 225 following a period of negative readings.
A shift in the ESI from negative to positive usually supports the strengthening of the Nikkei 225 based on historical correlations.
Unprecedented Low in Nikkei 225 Component Stocks Above 200-Day Moving Averages
Fig 2: Percent of Nikkei 225 component stocks above 200-day MA as of 8 Aug 2024 (Source: MacroMicro)
The massive bloodbath on 5 August pushed the percentage of Nikkei 225 component stocks above their 200-day moving averages to a mere 8.44%, a level not seen in over two decades.
Similar extreme lows in the past have coincided with bullish reversal zones for the Nikkei 225, implying a potential shift in sentiment and market direction.
Implications of JGB Yield Curve Dynamics
Fig 3: JGB yield curves major trends as of 8 Aug 2024 (Source: TradingView)
The steepening of Japanese Government Bond yield curves since June 2022 has mirrored the uptrend in the Nikkei 225, with recent bounces at key support levels hinting at a positive trajectory for the index.
Continued steepening in the JGB yield curves is expected to fuel a potential upward movement in the Nikkei 225, aligning with historical patterns.
Safeguarding the 30,460 Major Support in the Nikkei 225
Fig 4: Nikkei 225 major trend as of 8 Aug 2024 (Source: TradingView)
The Nikkei 225 is showing signs of a bullish reversal with a potential “Hammer” candlestick pattern, raising hopes of a medium-term recovery towards the 42,600/43,400 resistance zone.
A breach below the critical long-term support level of 30,460, however, could invalidate the recovery scenario, signaling a corrective phase targeting 25,770 initially.
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