Double Bottom Signals Nikkei 225 May Advance

Japan’s Nikkei 225 (NKY) Stock Average, the developed world’s worst-performing benchmark index since July 1, may rally to 10,000 if it completes the formation of a so-called double bottom pattern, according to analysis by Mitsubishi UFJ Morgan Stanley Securities Co.

To form the chart pattern, the benchmark gauge needs to advance to 9,136.02, equaling a July 4 high between intraday lows on June 4 and July 25, said Naohiko Miyata, chief technical analyst at Mitsubishi UFJ Morgan Stanley. From there it will advance toward 9,500, a level representing a 62 percent Fibonacci retracement of the gap between the March 27 intraday high and the lowest point during trading on June 4, he said.

“If the index can break 9,500, it will no longer be a simple rebound but a strong rally where we can expect to reach 10,000,” said Miyata at the brokerage unit of Mitsubishi UFJ Financial Group Inc., Japan’s biggest bank by market value. Since last year’s March 11 earthquake, the Nikkei 225 has moved between a high of 10,255.15 and a Nov. 25 low of 8,135.79. “A double bottom near the low end may mean there’s strong development ahead,” he said.

The last time the Nikkei 225 surged after forming a double bottom was in 2010, when it jumped 13 percent after lows on Feb. 9 and Feb. 26. After the most recent double bottom was formed, between May 27 and June 9, 2010, the index fell 13 percent through Sept. 1.

Moving Averages

The potential for a double bottom coincides with the gauge’s recent increase above its 25-, 75- and 200-day moving averages. The index tends to oscilllate from 12 percent below to 10 percent above the 75-day average, Miyata said. The Nikkei 225 was 12 percent below the 75-day mark on June 4. The Aug. 10 close of 8,891.44 was 1.6 percent above the average.

A double bottom is a chart pattern showing a drop in price, followed by a peak and then another drop to near the same level, again followed by a rebound, indicating support.

Technical analysts study charts of trading patterns and prices to predict changes in a security, commodity, currency or index.

To contact the reporter on this story: Satoshi Kawano in Tokyo at skawano1@bloomberg.net.

To contact the editor responsible for this story: Nick Gentle at ngentle2@bloomberg.net.

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