The Nikkei Is Attempting a Long-Term Bottom

Includes: AUSE, EWJ
by: Jeff Pierce

Whenever the Japanese economy is brought up in conversation, there is usually a general agreement that Japan's economy is decades away from improving. Some believe it will never improve and they’ll default and go bankrupt. John Mauldin describes them as “a bug in search of a windshield”.

It can be easy to remain bearish on Japan, as its economy has been mired with troubles since its peak in 1989, but there are some subtle signs that Japan could be attempting to put in some type of bottom. As a market technician, I’m less concerned about what ifs than I am with what is. And if you can set aside Japan's demographic problem with its aging population, stagnant growth prospects and currency issues, I’d like to present one positive side I see that Japan has going for it.

Its long-term technical picture is suggesting that a long-term bottom is trying to form. I’ve annotated 2 charts below that better illustrate this point. The first is a simple 20-yr monthly chart to show the wide base and support area around 7500. We actually dipped a little below support, but I view that as a slight positive because the chart was able to rebound where it could have easily continued on to new lows. As I said before, there are enough bears to go around where Japan is concerned.

We’ve seen this action before from 93′-99′ as 14k was a support area for a long time and it eventually broke down. But as you can see from that period that sideways markets do present some decent buying opportunities. So even if this is not the bottom, there is an opportunity for this to trade back to the 15-17k area.

A bottom has to start somewhere, and out of all the predictions and forecasts I’m reading for 2011, nobody is focusing on Japan as an area of potential future growth. From a pure contrarian point of view that interests me somewhat and when you combine that psychology with these charts, one could begin to see where I’m coming from.

The keys to take away, is that on this 5 month time frame, we didn’t form a traditional double bottom in November as the bears ran out of gas. The market then recovered 2 months of consolidation in 5 trading sessions, paused, and is in the process of forming a new up-leg. As long as it stays above that “new support” labeled below and can build upon it’s few successes, the Nikkei has a chance to do something positive for a change.