Nikkei Lags Behind

05/04/07 11:23:00 AM

by Arthur Hill

Despite an advance over the last two months, the Nikkei 225 is showing relative weakness, and the positive directional movement remains extraordinarily weak.

Security: $NIKK
Position: Sell

Stocks around the world swooned in late February and early March. The declines were swift, and the Nikkei was not immune to this global decline. The index broke below the January low and found support just above 16500. Global markets recovered in the March–April period and the Nikkei chimed in with a rising wedge advance back above 17500. Despite a pretty decent bounce, the index never made it back to its February high (Figure 1) and shows less strength than many of the US and European indexes.

FIGURE 1: NIKKEI. Despite a decent bounce, the index never made it back to its February high and shows less strength than many of the US and European indexes.

Graphic provided by: MetaStock.

In addition to relative weakness, the index broke below the lower wedge trendline and the +DI has been weak. The rising wedge captured the bounce above 17500, and the break below the lower trendline shows that the trend is breaking down. Indicator-wise, +DI moved below -DI and has yet to cross back above. This is quite unusual, and these indicators suggest that the rally was weak. The Nikkei advanced over 1,000 points and +DI could not overtake -DI. As long as +DI remains below -DI and the wedge break holds, the Nikkei may well move lower. See Figure 2.

FIGURE 2: NIKKEI. The index broke below the lower wedge trendline and +DI has been weak.

Graphic provided by: MetaStock.

What would it take to revive the bulls? The most obvious bullish signal would be for +DI to move back above -DI. On the price chart, the Nikkei formed a smaller falling wedge over the last three weeks, and I am watching wedge resistance for a breakout. A move above the upper trendline and the April 23rd high (17656) would put the bulls back on track and argue for a challenge to the February high. As long as the index remains below 17656, relative weakness and -DI rule the roost, and we should expect lower prices.

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 Lags Behind

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