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Surprise easing from the Bank of Japan (BOJ) at the end of October fueled gains in the Nikkei, but data Monday showing Japan unexpectedly entered a technical recession interrupted the uptrend and charts indicate further upside may be limited.
The BOJ surprised markets at the end of October by expanding its stimulus program, while the Government Pension Investment Fund readjusted its target allocations, increasing the amount of domestic stocks that it buys. Together, the initiatives pushed Japan's Nikkei to fresh seven-year highs above 17,000.
Growth data released on Monday damped optimism about further stock gains, however. The economy contracted an annualized 1.6 percent in the third quarter following a 7.3 percent contraction in the second, putting Japan in a technical recession and calling the effectiveness of Abenomics – Prime Minister Shinzo Abe's over one-year-old plan to kickstart the Japanese economy – into question.
A month ago we noted the limits for the Nikkei rise; these targets have been achieved. These same methods are used to define the downside limits for the Nikkei's retreat and the future upside limits for any recovery rebound rally.
The BOJ surprised markets with second round of monetary easing on October 31, pledging to step up purchases of exchange-traded funds and real estate investment trusts, extend the duration of its portfolio of Japanese government bonds, and increase the pace at which it expands its monetary base.
The BOJ's move accelerated the dollar-yen's breakout above the peak resistance level near 106. The behavior of this fast rally is constrained by the pattern of trading band activity that has dominated the market since June 2013.
A stronger U.S. dollar pushed gold within range of a fresh four-year low last week after the U.S. Federal Reserve brought its asset-purchase program to an end last week, and charts suggest further downside is likely.
There were two significant changes on the Gold chart in the past several weeks: the position of the downtrend line was adjusted to take into account the failed rally breakout in July; a move below the historical support level near $1,180.
The key trend feature of the weekly Comex gold chart is the downtrend line starting from the high near $1,799 in October 2012. Most recently, the line uses the high of $1,347 in July 2014 as a confirming anchor point for the downtrend line. Any change in the downtrend will require a price breakout above the value of the downtrend line, currently near $1,259. The trend line defines the downtrend but does not assist in setting downside targets.
Expectations that the Federal Reserve will hike interest rates in the first half of 2015 coupled with concerns about the health of the euro zone economy are weighing on the euro/dollar, but as key technical levels are achieved charts raise an important question: Are we looking at a breakout or a continuation of the downtrend?
When the euro/dollar fell below $1.34 at the beginning of September we set a down side target at $1.28. This was achieved and exceeded; the pair is currently testing $1.28 as a resistance level.
The euro/dollar has traded between two broad trading bands since September, 2012; the $1.34 level is in the middle of this trading band.
Japan's Nikkei had a huge day on Monday, surging 4 percent to stage its biggest rally in 16 months, as investors scooped up bargains after a rout last week caused a 5 percent slump in the index.
The market also rallied on news that Japan's Government Pension Investment Fund, the world's largest public pension fund with some $1.21 trillion in assets, is working on raising its portfolio allocation devoted to domestic stocks to around 25 percent.
But is the positive momentum for the market, which has lost some 10 percent since its year-to-date highs in September, here to stay?
Read MoreAre Japan stocks a bargain yet?
If the charts would have their way, the answer would be no.
The Nikkei is dominated by a series of historical support and resistance lines. The placement of these areas is calculated by projecting the width of the historical trading band. This method of trading band projection has been very useful in defining targets during the uptrend. It will also help define the support targets for any market retreat.
The critical lower level is 14000. This area was tested as support several times between February and May this year. The rebound comes off a fall towards this historical support level.
U.S. stocks on Monday fell for a third session, with the S&P 500 closing below its 200-day moving average and the Nasdaq Composite off 8.6 percent from its September record, leading traders to warn of a deeper correction, but charts suggest a potential buying opportunity.
The U.S. market has been running hot for months. It's a well-established and long-term sustainable trend propelled by 'funny money' available at virtually no interest. Fundamentally, its suspect, but technically this has been a trading opportunity not to be missed.
Nymex crude oil fell below $90 per barrel for the first time in 17 month last week amid signs of a supply glut, and charts suggest further downside.
Prices dropped amid signs that supply will outpace slowing demand from China and Europe. In September, the International Energy Agency (IEA) cut its 2015 oil demand forecast by 165,000 barrels per day. Meanwhile, the IEA forecast U.S. oil production to reach its highest level since 1970 next year, while Saudi Arabia, the world's biggest oil exporter, cut prices for its crude oil last week amid slack demand.
Nymex oil has been trading in a broad band between $88 and $110. The weekly chart shows an uptrend starting June 2012 – trend line A, which starts near $81. Trend line A connects the lows in November 2012 and the low in April 2013 – three anchor points for the uptrend line. The rebound in 2014 January confirms the position of trend line A, which is a steady, slow-moving uptrend.
Expectations that the Federal Reserve will raise interest rates in early 2015 coupled with growth headwinds in Europe have pushed the U.S. dollar index higher, but charts suggest that upside is limited.
The monthly U.S. dollar index chart puts the recent rally into a broader context.
From November 2011 to August 2014 the U.S. dollar index traded in a sideways consolidation band between $0.79 and $0.84. The width of this band is projected above long-term resistance near $0.84 to give an upside target near $0.89. There is a strong probability that the current rally will reach this target.
Chinese stocks stormed higher in recent months on the back of stronger economic data, easy monetary conditions and supportive policies from Beijing, recently touching an over one-year high, but charts indicate they may face a period of consolidation.
The Shanghai Index has developed a powerful rally that reached the longer-term targets near 2330 that we set several weeks ago. The pattern is very bullish; this is part of a long-term fan pattern trend-reversal breakout similar to the pattern in 2006. The typhoon flag pattern has been confirmed; the upper edge of the typhoon flag provides the first support level for a retreat from the resistance level upside target near 2330.
Current index activity is contained between the long-term resistance level near 2330 and the value of the upper edge of the typhoon flag pattern near 2278. There is a high probability the Shanghai index will retreat from resistance and consolidate between 2278 and 2330. This consolidation activity has the characteristics of an up-sloping triangle pattern. This is a bullish chart pattern.
Gold fell to its lowest level in nearly three months last week on concerns that a strong U.S. dollar and improving U.S. economy could damp demand, and silver charts suggest that bullion may not regain upward momentum anytime soon.
The downtrend in COMEX silver – shown in cents on the weekly chart – is well-established and prolonged. Technically silver is pounding out a support base near $18.70 and although there has been a reduction in downward momentum there is no technical or chart evidence of a developing rebound and reversal.
Upside targets remain limited, while technical downside targets have yet to be tested by a fall below support near $18.70. Analysis of Silver is useful because the price behavior of silver has led gold prices since 2011. Understanding silver gives traders a leading advantage when it comes to anticipating the behavior of gold.
The significant feature in the silver chart is the retreat and retest of the support level near $18.70. A successful fourth retest of support near $18.70 would confirm a long-term sideways consolidation.
Silver has strong long-term resistance near $26.00. Resistance also developed near $24.00, which is the first target for any successful breakout above the upper edge of the long-term group of moving averages where the value is currently near $21.80.
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.