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Nikkei’s 11% Surge Defies Momentum Sell Signal: Chart of the Day

Japan’s Nikkei 225 Stock Average has defied chart watchers by gaining 11 percent since Feb. 14, even as a technical measure of momentum signaled prices would drop the last month. Gains may continue, if history is any guide.

The CHART OF THE DAY tracks Japan’s benchmark equities gauge against instances where its relative strength index, a measure of price momentum, moved above the 70 level that some traders see as a signal to sell. The Nikkei has exceeded that threshold on 24 of the last 27 days, the most since 2005. Whenever the RSI reached 77 or more since 1991, the index advanced 9 percent on average in the next 90 trading days, according to data compiled by Bloomberg.

Applying the same criteria, the Nikkei may gain 3.3 percent to 10,339 by the end of June, extending a rally that accelerated on Feb. 14 when the Bank of Japan unexpectedly added 10 trillion yen ($121 billion) to an asset-purchase program to boost the economy. In 2005 the Nikkei advanced 19 percent in the 90 trading days after the RSI first crossed above 77 on Nov 18.

“There is usually a lag between when the RSI tops out and when the Nikkei peaks,” said Yutaka Miura, senior technical analyst at Mizuho Securities Co. in Tokyo. “The market continued to rise back in 2005 and shares may keep advancing this time, too.”

Even when the RSI signals overheating, stocks tend to climb as long trading turnover increases, Miura said. The average daily value of shares changing hands on the Tokyo Stock Exchange has risen to 1.40 trillion yen this month from 1.34 trillion yen in February, Bloomberg data show. The average was 852 billion yen in December.

The relative strength index is a momentum indicator that compares the size of recent gains and losses to determine whether an asset is overbought or oversold. A level 70 or above signals overheating to some traders, while a level below 30 indicates an asset’s price may be poised to rise.

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