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The Nikkei opened below yesterday's lows and trended lower from there. This left a gap in the prices. As this Great Graphic, composed on Bloomberg shows, gaps in the daily bar chart of the Nikkei are not so uncommon. Partly this may be due to a knock-on effect of developments when Japanese markets are closed, and especially impulses from the U.S.

In painting, one is told that it is not just about the objects, but the space between and around them. In music, it is not only about the sound, but the silences between sounds. So too when studying the price action. It is not just about the prices, but technicians also watch where prices do not trade.

On this chart, we identify different types of gaps. The Nikkei gapped higher on Nov 12, which was a Monday, which means the gap appears on the weekly bar charts as well as the daily's. Just like a weekly trend line is thought to be more significant than a daily trend line, so too with gaps on the weekly charts being understood as more significant than gaps only on the daily bar charts. We suggest that this gap was a breakaway gap, signaling and end of the down move.

The next gap we identify is from Nov 14. We suggest that is a measuring gap. It was followed by another gap higher the next day, which, with the benefit of hindsight, is roughly halfway of the move.

We identify the gap from last week (Nov 28) was an exhaustion gap. It marked the end of a move and there was not follow through buying as we saw with the measuring gap, though yesterday's rise to new highs shows that this is not perfect and is an art rather than a science.

Yet confirming our suspicions, the Nikkei gapped lower today. The question is what kind of gap is this. If it is a normal gap, it should be expected to be filled in the next day or two. The gap extends from today's high of 15579 to yesterday's low of 15662. On the other hand, if the gap is not filled, it would suggest this is a breakaway gap and the start of a pullback after a 12.5% rally since Nov 8 low.

The first retracement target is near 15120 and also corresponds to the brief congestion area around the middle of November and the 20-day moving average. The next retracement would project toward 14910, which is around 50% of the advance. The last major retracement target is near 14700. Such a move would fill some of the older gaps that we identified as measuring gaps. We note that the 100-day moving average comes a bit below there near 14375.

Other technical indicators also warn of the likelihood of additional near-term losses. We note that the MACDs are turning down. There is a small bearish divergence in the RSI, which peaked on Nov 25 and did not confirm the new high in the Nikkei. The slow stochastics appear poised to turn down.

This bearish technical read dovetails with our fundamental concern that Japanese investors may look to take profits after this year's dramatic run up ahead of the doubling of the capital gains tax on Jan 1 to 20%. Japan is also set to launch a new savings scheme on Jan 1 (NISA), which will use tax incentives to encourage new equity investment (JPY1 mln max per year for five years). We suspect that some households will sell shares ahead of the capital gains tax hike and roll into NISA next year.

We note that yen moves in the opposite direction of the Nikkei about 86% of the time of the last 60 days. This is the highest in 3-months and reflects a substantial tightening of the relationship since the below 30% readings a month ago. It is not immediately clear that the dollar has put in at least a near-term high against the yen. Yesterday's price action did not amount to a key reversal and there has been no follow through dollar selling today. The Nikkei appears to be leading the yen.

Source: The Nikkei, Gaps And The Yen