Nikkei May Rally on Double Bottom: Technical Analysis

Japan’s Nikkei 225 Stock Average is on course to surpass its year-high and climb past 16,000, should it form a “double bottom,” according to Nomura Holdings Inc.

With 25-, 75- and 200-day moving averages all pointing upward, the Nikkei 225 is testing an intraday high on July 19 of 14,953.29, Shoichiro Yamauchi, an equity-market strategist at Nomura, said in a telephone interview on Sept. 27. If it overcomes that level, it’ll form a double bottom with the lows on June 13 and Aug 28, Yamauchi said. This pattern shows a drop, a rebound and then another slump approaching the previous low, usually signaling support.

“I think the market is at a watershed right now and the Nikkei is moving toward the completion of a double bottom,” Yamauchi said. “If it does, it may extend gains above 16,000.”

An advance to 16,000 would take the Nikkei 225 to the highest since December 2007. The gauge closed at 14,455.80 yesterday, capping an 8 percent rally for September and a 5.7 percent advance for the quarter. It has surged 39 percent this year as of yesterday, making Japanese stocks the best performers among developed markets.

The equity measure has extended gains after exiting a so-called triangle pattern formed by highs on May 22 and July 18 and lows on June 13 and Aug 28, Yamauchi said. Still, in the short-term the market may face resistance amid overheating signs, he said.

Overheating Signs

The Nikkei 225’s 14-day relative strength index, a gauge of trading momentum, was at 65 on Sept. 26, near the 70 threshold that some traders say portends a selloff. The 25-day Toraku index, which compares the number of stocks that have advanced with the number that have declined on the broader Topix index, rose to 122.73 on Sept. 26. A reading above 120 indicates to some investors a drop is likely.

“The market seems to be overbought in the short term,” Yamauchi said. “But the correction should be minor because the overall chart pattern is bullish. Shares are likely to extend gains thereafter.”

In technical analysis, investors and analysts study charts of trading patterns and prices to forecast changes in a security, commodity, currency or index.

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