Nikkei 225 rally hits resistance level

JAPANESE stocks are all the rage in 2023, experiencing one of the world’s best equity rallies this year, gaining over 6 per cent in May 2023 as the Nikkei 225 Stock Average reaches levels unseen since 1990.

The rally is being driven mainly by bullish sentiment brought about by corporate governance reforms boosting valuations and loose monetary policy adding to tailwinds. The sinking of the Japanese yen to its lowest in recent weeks as the USD/JPY pair scaled above the 138 level has also lent momentum to the rally while the purchasing power of dollar-based investors strengthened. Exchange data showed that foreign investors were net buyers of Japanese equities for a sixth straight week. Shares of exporters, electronics makers and service-sector companies provided the biggest boosts to the index with Nippon Paper Industries, a pulp and paper manufacturing company, and Otsuka Corporation, an IT service management company, posting fresh 52-week highs.

On the technical charts, a bullish impulse wave has carried the Nikkei 225 to the strong resistance level near 30,700 after it broke out of the 29,200 swing high resistance formed in August last year. The index currently faces horizontal resistance which acted as swing highs in February and September 2021, confluent with an uptrend channel resistance. The Relative Strength Index (RSI) technical indicator is also flashing an overbought signal as it crossed 70, hitting a high of 80 at one point, leaving the index vulnerable to a pullback if traders book recent gains.

With the US debt-ceiling negotiations at an impasse nearing the early June deadline, the index could pare gains as traders look for reasons to take profit. The surge in Japanese stocks to more than 30-year highs has also been accompanied by an unusual phenomenon – a spike in volatility. The Nikkei Volatility Index climbed over 20 per cent from 16 to 20 during the rally, suggesting that traders have loaded up on hedges using call options.

The writer is research analyst at Phillip Securities