Japan's benchmark stock index the Nikkei has had a great past one month rising more than 12 percent in the run up to the Japanese polls on December 16. On Monday, a day after the opposition Liberal Democratic Party won a comprehensive victory, the index hit an eight-and-a-half month high.
But the index has two resistance levels that cap the current rally breakout. The first resistance level is near 10,200. This is a shorter term resistance level that developed from the two rally peaks in July 2011 and March 2012.
The longer-term resistance is created by the peak high in February 2011. This high, and the low in March 2009 have created a very wide trading band. The Nikkei has been trapped within the confines of this band for three years. Recently, starting in July 2011, the activity has been defined by a narrow inside band with support near 8,300 and resistance near 10,200.
The current rally has a high probability of retreating from resistance near 10,200. The downside support level is near 9,000.
If the market is able to move above 10,200 then the resistance is near 10,600. There is a low probability of the market moving above the long-term resistance level.
A move above 10,200 may see some consolidation develop between 10,200 and 10,600. This is a bullish development but the consolidation may continue for several months before any breakout develops.
This is a rally and retreat market. It is not a trending market.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com . He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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