Correction highly likely as Topix nears 1,823 resistance level

AMID the soaring Japanese equity market, the long-term price pattern of the Topix reveals a major obstacle ahead. With the Bank of Japan being the last few central banks to have any plans to tighten monetary policy, the excess liquidity continues to drive the Japanese equity market higher, and the current bullish momentum appears unrelenting.

Both the Nikkei 225 and Tokyo Stock Price Index (Topix) soared to a new 52-week high with the Nikkei 225 leading the way as it has already surpassed 23 per cent above the 2007 high of 18,300 points while the Topix is only currently testing the 2007 high of 1823 points. Topix is a capitalisation-weighted index of all firms listed on the first section of the Tokyo Stock Exchange.

The price action becomes more interesting as the Topix approaches its multi-decade top between 1,708 and 1,823 points. The 1,708 point was first established in September 1993. Since then, it has been a stumbling block for the bulls. There were six prior attempts by the bulls to take price higher above the 1,708 roof, but every single try was rejected aggressively as shown by the down arrow. During the housing boom period of 2000, the Topix managed to break above the 1,708 critical resistance in February 2007.