Japan’s Nikkei225 index hit new highs since February 1990 on Thursday morning and climbed above 35000. The rise accelerated sharply this week after breaking above the 34000 level, which acted as resistance in the second half of 2023.
The fundamental reason for buying was the dramatic drop in expectations that the Bank of Japan would unwind its ultra-soft monetary policy. The 1 January earthquake and a faster slowdown in consumer inflation have reversed sentiment in the markets.
On the tech analysis side, the Nikkei225 reversed to the upside after touching the 50-day moving average, as it has done repeatedly since November.
However, the move became excessive on Wednesday and Thursday due to likely short covering after breaking important resistance.
In the short term, the index looks overbought, setting up for a local correction in the coming days. However, the big bull cycle in Japanese equities seems to be far from over.
The Nikkei225 doubled from the 2020 lows to the 2021 highs, and the 2022 decline has corrected this rally to a classic 61.8% of the original rise. The buying intensification in 2023 marked a renewal of multi-year highs and a correction to the 2021 peaks.
The development of this pattern opens the door for gains above 40,300 (+14% from current levels) within 12-18 months.
The short-term outlook is less certain as Nikkei225 is overbought to the maximum since May 2022 on RSI on daily charts. Also, the Japanese equity index is close to the 161.8% point of the October-November upside amplitude. This sets up a new wave of profit-taking on the approach to 36000, which is quite close to Thursday’s peaks, forming a not-so-attractive risk/reward ratio.
