Of all the indexes I cover, there is no other stock market that I am more bearish about than the Japanese index, the Nikkei. But let's be under no illusions. The massive bear market that has been in force since the 1989 top is done and dusted.
Let's take a top down approach to the analysis beginning with the yearly chart.
Nikkei Yearly Chart
I have drawn a downtrend line across the 1999 and 2007 tops which shows price busting above this resistance level back in 2013. This was the first sign the bear trend may be over. Any pullback now should not break below this trend line.
The next sign that a new bull market was in play was price busting above the previous swing high being the 2007 top which is denoted by the horizontal line.
So, we have a higher high in place and all that is now required to confirm the new bull trend is for price to come back down and put in a higher low.
The Bollinger Bands show price has moved up to the upper band for the first time in over 25 years. Considering the power of the bear trend that has been in force I would think some consolidation is in order and hence I favour price to do some more work around the middle band before the bull trend really kicks into gear.
The PSAR indicator has a bullish bias after price busted the dots on the upside last year. Before the bull trend really unleashes, I expect price to come back to test the support given by the dots which are now on the downside. These dots are currently at 7553 and will be around 8000 next year.
The RSI showed a bullish divergence at the 2008 low and is now up in overbought territory so a pullback would certainly not surprise here.
The Stochastic and MACD indicators are both trending up and looking very bullish however their averages have started to diverge somewhat so a pullback would bring them back to normalcy before that continue higher.
So, the expectation now is for price to come back down and put in a higher low. Where is this higher low likely to be? Let's go to the monthly chart to try and answer that.
Nikkei Monthly Chart
We can see the horizontal line denoting the previous swing high and price recently busting above it indicating a new bull trend in play.
The Stochastic indicator shows a recent bearish crossover while the MACD indicator is still bullish but a bearish crossover certainly looks very possible shortly.
There looks to be the potential for a head and shoulders bottom to form. The 2003 low was the first shoulder while the 2008 low was the head. We now just require price to come back down and form the second shoulder.
I have added Fibonacci retracement levels of the move up from 2008 low to recent high. The first correction in a new bull market often makes a deep retracement and that is my expectation here. I favour a correction back to at least the 76.4% level at 10123 and even as low as the 88.6% level at 8506. Personally, I favour somewhere in between.
I have drawn a Fibonacci Fan from the 2008 low to recent high and I am targeting the final low to be at support given by the 88.6% angle. This looks set to occur in late 2016 just above the 88.6% retracement level.
Also, I am looking for this correction to be a measured move equalling the move down from the previous swing high in 2007 to the 2008 low which was 11306 points. Subtracting this amount from the recent high at 20252 gives a low target of 8946. That would mean a 55% correction.
Nikkei Weekly Chart
The RSI shows a triple bearish divergence in its final run up into top.
The Stochastic indicator has had a bearish bias since the week after the top and that remains in forces despite the recent rally.
The PSAR indicator has a bearish bias with the dots above price. The dots currently stand at 20153 and I expect that resistance to hold.
I have drawn a Fibonacci Fan from the October 2014 low. This shows the recent run higher being generally contained between the 50% and 61.8% angles. On the way to the top price was challenging the 50% angle while it now appears to be challenging the 61.8% angle. I favour this 61.8% angle to give way shortly as price breaks lower.
Let's wrap it up by looking in close at the daily chart.
Nikkei Daily Chart
The recent high at 20252 was accompanied by a quadruple bearish divergence on the RSI and a triple bearish divergence on the MACD indicator. This is bearish indeed.
I have drawn a horizontal line denoting the previous swing low level. We can see price has busted below this level thereby putting in a lower low. We now just await a lower high and the bear trend will be off and away.
Where is the lower high likely to be?
I have added Fibonacci retracement levels of the recent move down and, in line with the first bear rally in a new bear market making a deep retracement, I favour price rallying up to at least the 76.4% level at 20017 while the 88.6% level at 20138 may be a tad too high. Let's see.
Summing up, I believe a massive new bull trend is in play now. However, a higher low will be needed to confirm that and it is my expectation now that price will get absolutely smashed to the order of over 50% as it searches for that higher low.