|One of the basic tenets of technical analysis is that broken resistance turns into support. The index established resistance at 11239 with three touches over the last six to seven months. While below neckline support, 11239 was a source of supply or selling pressure that prevented the index from moving higher. Now that demand has overpowered supply, this level becomes a source of demand and will be the first test of bullish resolve. A move back below 11239 would reflect weak demand.|
|The trendline extending up from May 2003 is the next item on the watch list. This trendline has been touched three times, which makes it a valid trendline as opposed to a tentative trendline. The price scale is semi-log (percentage based) and the trendline represents the rate of ascent. As long as this trendline holds, the rate of ascent is consistent and clearly rising. A move below the lower trendline would show weakness and question the uptrend.|
|Figure 1: Nikkei 225 daily chart.|
|Graphic provided by: MetaStock.|
|The February low represents the last bastion of bullishness. A failure to hold above 11239, a trendline break and a move below the February low would firmly tilt the balance back to the bears. This would show increased selling pressure and mark a significant turning point.|
Figure 2: Nikkei OTC daily chart.
In addition to the Nikkei 225, traders should also keep an eye on the Nikkei OTC, which represents the more speculative branch of the Nikkei and recently moved above resistance and to a three and a half year high. In contrast, the Nikkei 225 is only at a 21-month high. The Nikkei OTC formed a consolidation in February and broke resistance a day ahead of the Nikkei 225. As long as the Nikkei OTC holds above consolidation support at 1500 the prospects for both Nikkei indexes remains bullish.
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