Roughly a month ago in the article “Nikkei 225 Break or Brake”, we discussed the possibility of the Nikkei 225 index breaking out of the major resistance level at around 23,000.
At present, the Nikkei 225 is upward testing the 25 year high and resistance level at around 24,000.The last attempt in January 2018 was not successful and eventually, a bearish trend was formed and touched below 21,000. Although past performance does not necessarily indicate future performance, will history repeat itself?
On a daily chart, an uptrend can be seen that began in early September. A strong bullish candle broke the major resistance level at around 23,000 and the index continued to approach 24,000. However, the technical analysis may be showing some red flags. First, the Relative Strength Index (RSI) is showing an overbought signal in recent days. Furthermore, a bearish divergence is highlighted in the purple area. In plain speech, the RSI is suggesting diminishing momentum of the trend, in contrast to the uptrend in Nikkei 225. Hence, a reversal is possible.
Looking back at January 2018, a similar situation occurred. A strong bullish candle broke 23,000 in the middle of an uptrend but RSI showed an overbought signal with bearish divergence. The Nikkei 225 consolidated in an attempt to break 24,000 but failed at last.
Similarities are appearing at the moment which is worth putting the Nikkei 225 on the watchlist in case of a trend reversal. A possible strategy may be an entry point around 24,000. An appropriate stop loss could be roughly above the highs in January 2018 at 24,200. Retracement levels worth watching are around 23500 (Fibonacci 38.2%), and subsequently around 23,200 (Fibonacci 61.8%)
Nevertheless, a break of the 24,000 is possible if the macroeconomics in Japan continues to improve or the Japanese Yen slid further. Thus, a new high in 25 years may be reached.