Once again, I have put my best foot forward on behalf of the Nikkei to move higher. Each time I have argued in support of this index, it has moved in the opposite direction that was written about. Now that I finally have a winning trade short term (longer term I have been correct on this index), I am beginning to wonder if the move is sustainable. Last week I posted a chart of the Nikkei, using Fibonacci and some very major trend lines. Here is a new version of that chart.
Last week, the Tankan Survey was released and the results of the manufacturing and non manufacturing ends showed continued rising strength. Since I am lacking the hard numbers to this report, I had to use a recent research note by David Malpass of Bear Stearns. He is bullish on the Japanese economy (as well as the US Economy though that is nothing new) and posted some very nice charts – of course I cannot get them into this story because of translations issues so you will have to visualize my analysis.
In short, the non manufacturing and manufacturing ends of this survey are on fire to the upside, quarter over quarter. The large manufactures end moved to 25 which is the highest level in the index since 1991. The large non manufactures index rose to 22 which is the highest level in this index since January of 1992. In short, the Japanese economy appears to be rip roaring strong.
Now, many will argue against such a positive story based on mediocre growth and mixed inflation signals. Further, the BoJ is shrinking the monetary base aggressively as part of their tightening policy and employment growth is mixed to higher. However, historically, the Nikkei does not respond to these numbers as much as it responds to the Yen and the Tankan Survey.
When the Tankan is moving higher, the Nikkei is moving higher. That has been the case several times over the past 20 years. Thus at the moment, while other economic numbers are mixed, the improving Tankan agues for higher Nikkei 225 levels. In addition, the Yen has run into a good thrust of bearish trade lately, even with these good numbers. While the currency looks like it could get stronger, it just isn’t. Thus, the Nikkei looks like it has good support to go higher.
However, the Nikkei has moved up so fast over the past few weeks that it has moved into an overbought situation on my weekly MIR 2 models (MIR 2 models are used to measure whether a stock is overbought or oversold within its chart trend). This last occurred in December of last year. The following week saw the Nikkei correct back 400 points before the rally continued 3 weeks later and migrated to the current levels. Thus, while I am bullish on the Nikkei, there are two headwinds. The first being the MIR 2model and the other being the breakout point. So I would look for some consolidation in the Nikkei and then a solid start to 2007 if the index is able to maintain the breakout point on the chart.
I am currently flat the Nikkei via my trading portfolio. I have an open sell stop below the market and a buy stop above. The primary trend remain higher.