A Major Support Test For The Nikkei

09/23/08 08:49:10 AM

by Arthur Hill

The Nikkei is trying to firm near its March lows, but momentum has yet to turn up and traders should watch for a signal line crossover in the MACD.

Security: $NIKK
Position: Hold

Figure 1 shows weekly candlesticks over the last two years. The Nikkei 225 ($NIKK) remains in a clear downtrend with a series of lower lows and lower highs. A harami formed with the March low and the index moved below this low with a spike below 12,000 in September. Despite the dip below 12,000, the index recovered and is attempting to firm near the March low. Firmness is one thing. A bounce is another.

FIGURE 1: $NIKK, WEEKLY. Here are the weekly candlesticks over the last two years. The index remains in a clear downtrend with a series of lower lows and lower highs.

Graphic provided by: TeleChart2007.

While the index breached its March low, the moving average convergence/divergence (MACD) (5,35,5) held above its March low for a potential positive divergence. Instead of the usual (12,26,9), I shortened the short moving average from 12 to 5 and lengthened the long moving average from 26 to 35. The signal line moving average is set at 5 (versus 9). This makes the indicator more sensitive to price movements. Despite a higher low and positive divergence working, the momentum oscillator has yet to actually turn up and move above its signal line. At the very least, a move above the signal line is needed to show improving momentum and confirm recent firmness.

FIGURE 2: $NIKK, DAILY. Note that the overall trend is down and the -DI (red) remains well above the +DI (green).

Graphic provided by: TeleChart2007.

Figure 2 focuses on daily prices with the positive directional Indicator and minus directional Indicator. The overall trend is down and -DI (red) remains well above +DI (green). Except for a head-fake in late August, -DI has been above +DI, and this corresponds with the three-month downtrend. The gap between +DI and a -DI is quite wide, and further strength is needed to close the gap and forge a bullish crossover. This would likely coincide with a trendline break and argue for a challenge to the May–June highs in the Nikkei.

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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MACD

A Major Support Test For The Nikkei

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