nikkei 225 daily outlook fri 22 jan 2016 maintain potential mean reversionsnap back rally view 17943

(Click to enlarge charts)

What happened yesterday

The Japan 225 (proxy for the Nikkei 225) has a sudden plunge in the Asian session due to a sell-off in China related equities in the Hong Kong bourses. A popular news media reported a finding from a senior analyst from a U.S. based investment bank that trading desks of major investment banks has started to unwind their bullish futures positions on the benchmark Hang Seng China Enterprises Index (HSCEI) as it broke below the 8000 level.

Even though, the Japan 225 has broken below the 16350 short-term pivotal support but the decline has managed to stall at the 16000 key medium-term support that we have been emphasising since the start of this week.Interestingly, it has managed to stage a reversal in the U.S. session at the 16000 level and recaptured 16350.

Please click on this link for a recap on our previous daily outlook/strategy.

Key elements

• The Index has formed a daily bullish “Hammer” candlestick pattern at the 16000 key medium-term support which reinforces our preferred mean reversion/”snap-back” rally view. This type candlestick pattern indicates a change in sentiment from negative to positive. But a point to note is that it does not mean that this change in sentiment is on a long-term basis and we need to examine other factors to further evaluate this diagnosis.
• The daily (medium-term) RSI oscillator still has room for further upside before reaching its resistance and 50% neutrality level. This observation adds credit to the mean reversion/”snap-back” rally scenario.
• The short-term significant resistance stands at 17290 which confluences with the 19 January 2015 swing high, close to the 38.2 % Fibonacci retracement of the steep decline from 18 December 2015 high to yesterday’s low and the pull-back resistance of the former range support that has linked up the lows of 16 December 2014 low to 29 September 2015.

Key levels (1 to 3 days)

Intermediate support: 16350

Pivot (key support): 16000

Resistance: 16890 & 17290

Next support: 15000 (psychological)

Conclusion

Despite yesterday’s decline in price action, we are maintaining on our preferred mean reversion/”snap-back” rally after evaluating the current technical elements and considered the prior day’s price action as “noise”.

As long as the 16000 pivotal support holds, the Index is likely to see a further potential push up towards 16890 before 17290.

However, a failure to hold above the 16000 key pivot may invalidate the mean reversion/”snap-back” rally scenario for a further decline to target the psychological level  of 15000.

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