Nikkei Tries To Hammer Out A Bottom

06/06/06 09:59:36 AM

by Arthur Hill

A hammer at support and indicator divergence could foreshadow a bounce in the Nikkei.

Security: $NIKK
Position: Hold

What goes up must come down. In the case of the Nikkei 225, the index surged from 15500 to 17500 in less than two months and returned right back to 15500 with an equally sharp decline. The decline was punctuated with a large gap down in early May and this gap has yet to be filled (red oval).

The decline created an oversold condition as the relative strength index (RSI) moved below 30 for the first time since May 2005. The 15-day RSI moved below 30 in late May, and this denotes an oversold condition. While the index continued lower in early June, the RSI held above 30 and formed a small positive divergence. This shows less downside momentum and could foreshadow a bounce. I drew a trendline extending down from the April high and would look for RSI to break this trendline before considering a bullish reversal in momentum.

FIGURE 1: NIKKEI, DAILY. The index surged from 15500 to 17500 in less than two months and returned promptly. But the index shows signs of firming with a hammer (green oval).

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

On the price chart (Figure 1), the index shows signs of firming with a large hammer (green oval). These single candlestick patterns have long lower shadows that reflect an intraday decline and rally from the lows. The bears forced the index below 15300 during the day, but the bulls rallied by the close and the index finished above 15700.

It is not a bad reversal, but it is only one candlestick and one day. The late May gap remains unfilled and hammers require confirmation. A move above 15900 would fill the May gap and a close above 16000 would solidify this move. The index failed to close above 16000 on May 29 and needs to show the ability to close strong. I would turn short-term bullish on a close above 16000 and then expect a rally back to the early May gap zone around 16650–850.

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 Tries To Hammer Out A Bottom

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