By Jonathen Chan (market analyst, CMC Markets and Stockbroking)
The Nikkei 225 index has been enjoying a decent rally since last week. This might be largely due to a weakened US dollar and optimism on recent trade negotiations. On a daily chart, the index is trading relatively range bound between roughly 22.000 (Fibonacci 38.2%) and a long time resistance level at around 23,000. The key psychological level around 23,000 has been tested at least 3 times since May 2018. The last break out of this level led to a record high of the index over 24,000.
As trade tensions subdue and investor sentiment lifts, risk asset such as stocks may find further support. On top of that, stocks may gain more bullish momentum if the US dollar strengthens and leads to a weaker Japanese Yen. At the same time, the MACD (12,26,9) is suggesting the Nikkei 225 slowly shifting towards a more bullish stance. Upward momentum is accumulating. If a break out happens, the index may soar and test the previous high at around 24,000.
In contrast, a retracement is also possible if geopolitical risk escalates. For instance, the trade tension between the US and China may elevate and trigger a risk-off move. Under the circumstances, the Nikki 225 index may retrace to the support level at around 22,000 (Fibonacci 38.2%).