Nikkei Passes 1st Test Of Broken Epic Trendline

15 months ago, we “stuck a fork” in the Japanese Nikkei 225′s legendary 20-year down trendline; this past week, the index underwent (and passed) its first test of the broken trendline.

If we had to pick the most dominant chart patterns of the modern markets era, 2 of the candidates would certainly be the lengthy down-sloping trendlines in the 30-Year U.S. Treasury Yield and Japan’s Nikkei 225 NI. The latter began its formation in the early 1990′s following a bubbly blowoff that ended the Nikkei’s lengthy secular bull market. After the initial bubble “pop”, the index would travel in a well-defined downtrend for 23 years, beginning in 1991, until it finally broke above the trendline in November of 2014. We marked that noteworthy event with a post on November 3, 2014 titled “Stick a fork in the Nikkei’s 20-year downtrend”.

In the 10 months following the trendline break, the Nikkei would go on to rally an impressive 30%, give or take, before getting caught up in the global equity selloff as it accelerated last August. And as most often occurs at some point to trendlines after they are broken, this one got tested for the first time over the past few days. By tested, we mean that prices came back down to “tag” the top side of the broken trendline. Thus far, the Nikkei 225 has passed that test with flying colors, jumping over 11% in just 2 days following the trendline tag.

A couple of stray thoughts regarding this development:

• We should not be surprised that a trendline of such epic proportions would be successful at holding prices up. Look for the trendline to continue to serve as stout support in future tests, albeit while sloping down away from prices. Should the trendline be breached in a meaningful way, and in short order, it will likely be associated with a further deterioration in the global equity landscape. Such a breach would be particularly unwelcome news for Japanese investors.
• Should the trendline hold up, especially in the face of further weakening of other developed markets around the world, e.g., the U.S. and Europe, an emerging secular bull market should not be ruled out in Japan. In a increasingly connected, and correlated, financial world, it may be difficult to imagine “decoupling” taking place to any great extent. However, remember that Japanese stocks topped out 26 years ago on a secular basis. One may have their doubts about the prospects of the Japanese market based on demographic and fundamental reasons but, cycle-wise, the market has satisfied any reasonable standards of corrective action. Therefore, we’ll keep an open mind about the possibility of an emerging secular bull market in Japan, even as most other global markets are headed the other way (in our view).

__________
More from Dana Lyons, JLFMI and My401kPro.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.