Nikkei 225, Dow 30 Show Bearish Patterns

What happens in Japan may not stay in Japan

Americans may often be guilty of short-sightedness and missing out on obvious trends and there’s one developing in Japan right now that should be of concern to them. One can hardly blame people for being naive or more focused on other matters, especially after the year of lockdowns and masking and jab shots they’ve just been through, but it would behoove anybody who holds risk assets to pay attention to the continuing struggle that is the Nikkei 225, Japan’s main stock market, which has been in a declining state for nearly two months running.

After closing at a level it hadn’t seen since 1990 on February 16 (30,467.75), the 225 has pulled back substantially, ending its Friday session at 28,812.63, a loss of 241.37 points (-0.83%). Friday’s close was the lowest since April 21 (28,508.55), but the interim closing low of 28,405.52 came March 28 and the index is approaching that level once again.

Japan’s markets were closed on Monday, May 3, for Constitution Memorial Day and are again Tuesday, May 4, for Greenery Day, and Wednesday, May 5, for Children's Day holidays, so investors there are taking a break but may be in for a shock when the Nikkei resumes trading on Thursday as markets in other parts of the world are shaking.

Like its counterparts in Europe and the United States, the Nikkei has been on a rocket ship to the moon since March of 2020, when it bottomed out at 16,552.83. In less than a year, the entire index had appreciated 84%, in concert with the bourses and indices of other developed countries, which likewise were roused from their lows with central bank infusions and guarantees of fiat largesse.

Investors made out well through the tumult of the pandemic, but valuations became stretched. In the US, the appetite for stocks still hasn’t quite subsided, but in Europe, and especially in Japan, the top of the market may have already arrived and the departing train has left the station.

Should the Nikkei continue its decline another 400 points to the March lows, a double bottom could be the result, but anything beyond that leads inexorably to a correction at the very least. A close below 27,420.98 would be a 10% decline. A verifiable bear market would occur some 3,000 points below that level.

A closer look at a chart of the Nikkei reveals that the index is residing beneath its 50-day moving average and has been since April 20, this being the third excursion into the area below the trend line since the recent high. The first was in early March, but the dip was only intraday though the period was marked by a series of deep declining sessions.

The second fall below the 50-day moving average happened in the latter part of March, when the index spent three full sessions - and part of a fourth - under the line. Both the first and second declines were followed by a series of small bullish sessions, the second wave not as pronounced as the first. Additionally, the bounce off the second low - which, on a closing basis was lower then the first - did not exceed the prior interim high, resulting in what now has become an elongated descending pattern since the beginning of April.

After April 19, when the Nikkei tumbled some 1,200 points over two sessions (April 20, 21), the index has remained below the 50-day moving average. It’s now been eight full sessions below that mark, and indication that the investors may have been a little too enthusiastic about stocks, the end of the pandemic and the upcoming Olympic Games, which run between July 23 and August 8.

Aside from the Nikkei, another indicator that markets may have reached a climax came into focus last Thursday. On April 29, the Dow Jones Industrial Average displayed an engulfing pattern. In fact, it was a double engulfing, wherein the highs and lows of the session exceeded those of the previous two. Though stocks finished the session with gains, the principle of such a chart pattern is indicative of a directional change. While Monday’s explosive gains on the Dow and other indices may have thrown some off the track, it bears notice that Friday’s smallish declines were well contained.

Discounting Monday’s ramp higher on US exchanges, futures are currently pointing to a lower open as the bull - inspired by massive interventions by central banks globally - may be running on fumes.

Bear in mind, Washington, DC is still in lockdown, not because of health concerns but something more sinister. The National Guard troops, fences and barricades erected in January still remain. Nearly three months beyond inauguration day, the appearance of the US capitol remains an armed encampment.

Not everything is as it appears.

Dow: 34,113.23, +238.38 (+0.70%)

NASDAQ: 13,895.12, -67.56 (-0.48%)

S&P 500: 4,192.66, +11.49 (+0.27%)

NYSE: 16,325.24, +105.91 (+0.65%)