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Nikkei Candle Pattern Portends Gains: Technical Analysis

Japan’s Nikkei 225 Stock Average, which capped its biggest yearly advance since 2005, may extend its gains this year, according to candlestick chart analysis by Tachibana Securities Co.

The index ended its last trading day for 2012 at the year’s highest close, creating 12-month white candlestick pattern with almost no upper wick, a bullish signal to some analysts. A wick shows the highest or lowest price. If the gauge’s close is higher than the open, the body is white. The Nikkei 225 failed to rise on the past two occasions when a similar pattern was formed, in 1999 and in 1989, tumbling at least 27 percent the following year.

“It’s very natural to expect this may be third-time lucky,” said Kenichi Hirano, general manager and a technical analyst at Tachibana Securities in Tokyo. “In recent years the pattern wasn’t working well. But it’s very possible that it will regain its true form. A buy signal is a buy signal, it comes from history. The pattern shows a year-end rally, indicating people are expecting a good year the following year.”

The benchmark index rose 23 percent last year, accelerating in December as the pro-stimulus Liberal Democratic Party won a general election, boosting optimism that Japan’s new leaders will do more to fight deflation and spur the economy. The yen weakened to a 28-month low versus the dollar on Jan. 2, bolstering the nation’s exporters, amid speculation new Prime Minister Shinzo Abe will push the central bank to increase cash infusions.

Deflation Fight

“This chart pattern is rare,” said Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, which oversees about $174 billion. “Japanese shares have been underperforming. With Abe indicating the government’s will to fight deflation, there isn’t much reason anymore to ignore stocks. If shares do end up falling, that will probably be because European shares tumble because of a global economic crisis and Japan gets dragged down.”

The Nikkei 225 gained 37 percent through Dec. 28 from the start of March 2009, the month in which global equity markets bottomed after the collapse of Lehman Brothers Holdings Inc. and the ensuing financial crisis. By contrast the Standard & Poor’s 500 Index in the U.S. rose 91 percent while the MSCI All Country World Index advanced more than 80 percent.

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

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