Golden Cross, Ichimoku Cloud Signal Japan Stock Rally

Japanese stocks may extend gains as a cluster of technical indicators signal a continuing rebound in the worst-performing equity market in the developed world this quarter, according to Tachibana Securities Co.

The Nikkei 225 Stock Average formed a “golden cross” on Aug. 20 when its 25-day moving average rose above its 75-day moving average, pointing to more gains, said Kenichi Hirano, a Tokyo-based strategist at Tachibana. The broader Topix Index formed the pattern yesterday. Both gauges on Aug. 16 broke above their Ichimoku clouds, an indicator of support, according to data compiled by Bloomberg.

“Several indicators have surpassed key levels,” Hirano said. “That signals the market has bottomed out and stocks are now out to test their highs.”

The Nikkei 225 gained 1.9 percent this quarter through yesterday. The gauge has returned less since June 29 than any other developed market except Ireland, where the ISEQ Overall Index advanced 0.5 percent for the period. The 1,672-member Topix isn’t included among Bloomberg’s developed markets benchmark indexes.

The last time the Nikkei 225 formed a golden cross right after emerging from an Ichimoku cloud was in early February. The benchmark gauge then surged 16 percent to its March 27 high.

The Nikkei 225’s completion this month of a so-called double-bottom pattern may be another reason to expect a rally. The benchmark on Aug. 17 surpassed a July 4 high that was reached between lows on June 4 and July 25, tracing a W-shape that suggests underlying support for stocks, according to Naohiko Miyata, chief technical analyst at Mitsubishi UFJ Morgan Stanley. Technical analysts study price charts and trading patterns to make forecasts.

More Volume

Still, without more trading volume it’s not certain that the chart patterns are reliable signals, Tachibana’s Hirano said. The average number of shares changing hands on the Topix each day this month has been about 12 percent below the 12-month average. Volume fell to the lowest this year on Aug 13.

“With thin trading, it’s easy for the market to break its form,” Hirano said. “Fewer participants mean things can be rocky.”

Ichimoku analysis, developed by a Japanese journalist in the 1940s, attempts to predict a market’s direction by analyzing the midpoints of historical highs and lows. The conversion line plots the sum of the highest high and lowest low during the past nine trading days, while the baseline is the same calculation covering the most recent 26 days.

Ichimoku Cloud

The so-called Ichimoku cloud is the region between one line based on the mean of the conversion and base lines and another that takes the average of the highest high and the lowest low from another preset period.

Both the Nikkei 225 and the Topix Index have broken above their clouds, and their conversion lines have passed upward through their base lines. Another line based on closing prices projected 26 days in the past is also showing a bullish trend, said Yutaka Miura, a senior technical analyst at Mizuho Securities Co.

The combination of these “is the most bullish signal in Ichimoku chart analysis,” Miura said.

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