Nikkei's upside to be tested following volatile period

THE Japan market has taken centre stage again following a volatile period capped by the relatively controversial summer Olympics that was held in this July. While it was intended to herald the turnaround of the Japanese economy after decades of fighting deflation and a persistent lack of economy growth, the event did little to aid the political prospects of former prime minister Yoshihide Suga, whose approval ratings continued to decline even after the Games.

Suga took over from the long-serving Shinzo Abe. Suga did not have a smooth sailing as he took over the reins as Japan was grappling with successive Covid-19 outbreaks. Earlier this year, major factions within the Liberal Democratic Party (LDP) began withdrawing support for Suga as the general elections drew closer as they feared a repeat of 2009 when the opposition made significant gains within the Diet. Under such pressure, Suga made a relatively unexpected move - he resigned in September, sending the Nikkei surging past 30,000 within a week.

The much anticipated rise in the Nikkei came after our last Chartpoint article on June 14, 2021, with the rebound occurring at the previously indicated support zone. The upside however encountered strong resistance at the 31,000 psychological level. Faced with economic uncertainty and Covid-19 outbreaks, the Japanese economy does not seem to be faring as well as other major economies Its outlook remains relatively bleak.

However, their latest prime minister, Fumio Kishida has been hailed as a progressive leftist within the LDP faction and has since been lauded for presiding over a victory for the ruling LDP in end-October's parliamentary elections.

Will his liberal views on welfare spending and rejection of Abenomics bring about a much-anticipated revival of the Japanese economy?

Technical analysis perspective

As mentioned, the bullish run of the Nikkei above 30,000 was halted after completing the primary phase of wave ((1)), which saw prices correct itself in a double-three corrective flat pattern despite a rebound near 26,024-26,986, as mentioned in our last analysis (June 14, 2021).

The upside was capped below 31,000, forming a potential double top. Diving into the sub-wave analysis, the recent high at 30,714 can be seen as a sub-wave (i) of the new primary wave ((3)). It could also be seen as an extended corrective wave ((xx)) of the triple-three correction. Taking these scenarios into account, there are 2 potentials outcome for the Nikkei. The first potential outcome could be for the sub-wave (i) of the impulse move to break the resistance above 31,000. As prices continue to rally, they are likely to settle on a target beyond 33,000.

The second potential outcome could be that prices will face an extended corrective move back to the major support zone at 26,698- 25,370 or 23,597-22,871 lower support regions.

Taking the daily chart (Fig 2) with Ichimoku into consideration, the Nikkei remains rangebound. However, with Ichimoku's wave theory, a sub- "N" wave "Sandan" within the larger "N" wave is present. The "N" wave move was within the tolerance of the Ichimoku's Kihon-suchi numbers. The 9 period Henka-Bi rebound last Thursday (Nov 11) proves that the probability of a run towards 30,000 in the near-term is high, especially with the 9th period candles ending with a bullish engulfing candle.

• The writer is a technical analyst at Phillip Securities Research

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.

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