Nikkei Free-Falls To First Support Zone

01/18/06 07:48:12 AM

by Arthur Hill

Even though the Nikkei is near support, the sharp decline signals a sharp shift in trader sentiment that is unlikely to dissipate overnight.

Security: $N225
Position: Hold

On the daily chart (Figure 1), the Nikkei 225 ($N225) remains in an uptrend and the recent decline is nearing support around 15000. This support is confirmed by the August 2005 trendline and December 2005 lows. Both converged around 15000 coming in toward the end of January and the index hit 15059 with Wednesday's low. Should the index break 15000 going down, I put the next support zone around 14000. The October high and early November consolidation confirm this support zone.

FIGURE 1: NIKKEI 225, DAILY. The Nikkei 225 appears to remain in an uptrend — but the recent decline did considerable damage.

Graphic provided by: MetaStock.

Graphic provided by: MS Quotecenter.

Despite support around 15000, the decline did considerable technical damage and confirmed two bearish candlestick patterns. Selling pressure started at the end of December, with a bearish engulfing pattern appearing on December 29 and 30 (red oval). The index then formed a potentially bearish harami in early January (blue oval). Both of these were confirmed with two gaps and two black candlesticks over the last two days. These gaps are bearish as long as they remain unfilled. It would take a move above 15810 to fill the first gap and start the process of reviving the bulls.

In addition to the confirmed candlestick patterns and gaps, the relative strength index (RSI) broke its support zone and has yet to become oversold. The Nikkei has been trending higher since May, and RSI found support around 50 in August and October (green box). This support zone represents the bullish threshold and the uptrend was firmly in place as long as it held. With the steep decline over the last few days, RSI broke its support zone and moved to its lowest level since May. Momentum favors the bears, and it would be prudent to wait for an oversold reading before attempting to pick a bottom.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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Nikkei Free-Falls To First Support Zone

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