nikkei 225 potential bullish tone remains intact 1819662016

Daily Outlook, Fri 01 July 2016

(Click to enlarge charts)

What happened earlier/yesterday

The Japan 225 Index (proxy for the Nikkei 225 futures) has staged an initial decline of 2.4% from Wed, U.S. session high of 15833, tested the predefined short-term pivotal support of 15500 (as per highlighted in our short-term technical outlook/strategy published yesterday, 30 June) before its staged the expected rebound.

Yesterday’s price action has reinforced our view that the Index is not likely to shape a deep decline at this juncture. Please click here to recap our prior short-term daily technical outlook/strategy.

Key fundamental events to highlight as follow:

• Yesterday, Bank of England governor Mark Carney has called for a press conference, the second since U.K. voted for Brexit on 24 June 2016 to state that BoE may need to implement more monetary stimulus in this summer to offset the economic shock/deterioration triggered by Brexit. This speech implies a potential interest cut from its current benchmark rate of 0.5% in the monetary policy meeting in July or August.
• Japan Core CPI (ex fresh food) for May has shown a decrease of 0.4% y/y which is a third consecutive month of decline after it dropped by 0.3% in March and April. Ironically, Core CPI (Bank of Japan’s benchmark measure for inflation) is now backed to the same level when BOJ governor Kuroda started his quantitative easing programme.
• Japan Household spending fell to1.1% y/y/ in May which also recorded a third consecutive month of decline where it decline by 0.4% in April and -5.3% in March.
• Given this spate of weak economic data from Japan, it is likely that BoJ may introduce more monetary easing measures in its next meeting on 28-29 July 2016. In addition, Prime Minister Abe and his government will face the pressure to provide fiscal stimulus to boast spending give the current limitations seen in monetary policy as interest rates have hit the negative region.

Key technical elements

• The key short-term pivotal support remains at 15500, no change from yesterday.
• The 4 hour RSI oscillator remains bullish above its ascending trendline support and still has room to manoeuvre to the upside before reaching its extreme overbought level. These observations suggest that upside momentum of price action remains intact.
• The next significant near-term resistance remains at 16160/300 which is defined by the former minor swing lows area of 13 May/03 June 2016, “bull trap” seen before the announcement of the  U.K’s EU referendum results and a Fibonacci cluster (see 1 & 4 hour charts).

Key levels (1 to 3 days)

Pivot (key support): 15500

Resistances: 15865 (medium-term pivot) & 16160/300

Next support: 15260

Conclusion

Maintain bullish bias. Overall, it is now highly likely that we are in a “melt-up” phase for risk assets given the upcoming new rounds of “monetary easing” measures from central banks that I have highlighted in my recent flash Q3 macro outlook seminar on 11 June 2016.

On the short-term outlook for the Japan 225 Index (proxy for the Nikkei 225 futures), as long as the short-term pivotal support at 15500 holds and a break above the 15865 level is likely to add impetus for a further potential upside movement to target the next resistance zone of 16160/300.

However, a break below the 15500 pivotal support may invalidate the preferred bullish scenario for a deeper pull-back towards the next support at 15260 (ascending trendline support in place since 24 June 2016 low).

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