- As Monday, 5 August witnessed a significant selloff in the Nikkei 225, it has sparked hopes of a bullish key reversal inflection week.
- The Citigroup Economic Surprise Index for Japan showed a positive turnaround on the same day, hinting at improved macro data.
- A notable percentage of Nikkei 225 component stocks are trading below their 200-day moving averages, signaling a potential turning point from bearish sentiment.
- Investors are advised to keep an eye on the major key support level at 30,460 on the Nikkei 225.
This analysis serves as a follow-up to the previous report titled “Nikkei 225: Bullish breakout with improved market breadth” released on 27 June 2024.
Following the previous publication, the Nikkei 225 managed to rally and achieve a fresh all-time high of 42,427 on 11 July 2024, nearing the medium-term resistance range of 42,600/43,400.
However, recent weeks have seen the Nikkei 225 facing significant bearish pressure attributed to various adverse factors, resulting in a sharp downturn due to fund flow disruptions and unwinding of risk-on-carry trade strategies.
The market plunged by 12.40% on Monday, 5 August, its most drastic daily decline since the infamous “Black Monday” crash of October 1987.
Furthermore, the current 4-week maximum drawdown stands at -26.60%, marking the steepest decline in a 4-week period since the onset of the Covid-19 pandemic.
Despite these challenges, three key factors suggest that the recent sell-off may signal a crucial bullish reversal for the Nikkei 225.
Upturn in Fundamental Indicators
An increase in Citigroup Economic Surprise Index (ESI) for Japan indicates a positive shift in economic data, potentially supporting the Nikkei 225’s recovery.
Exceptionally Low Levels of Component Stocks above 200-Day Moving Averages
The plummeting percentage of Nikkei 225 component stocks above their 200-day moving averages to 8.44% presents an extreme bearish sentiment, historically preceding bullish reversals.
Steepening JGB Yield Curves
The steepening trend in Japanese Government Bond yield curves aligns with the Nikkei 225’s uptrend, suggesting a positive correlation between the two markets.
Focus on Major Support Level at 30,460
The Nikkei 225 is exhibiting signs of a potential bullish reversal, with a move above 37,070 resistance paving the way for a recovery towards the 42,600/43,400 zone.
Conversely, a breach of the crucial support at 30,460 would negate the recovery scenario, potentially initiating a corrective decline phase towards 25,770.
