Japan's benchmark Nikkei Average has hitting 18-month highs in recent days, prompting market analysts to predict that the index would breach the 12,000 mark by the end of this month.
An analysis of the Nikkei's weekly chart confirms the uptrend will likely continue, with the 14,500 mark being the next resistance level after the index breaks the 12,000 mark.
The Nikkei shows the classic (GMMA) trend change relationships. There are three relationships found in a sustainable trend breakout and the development of a new uptrend. These are relationships between the long term group of moving averages and the short term group of moving averages. The long term group is used as a representative of the attitudes of investors. The short term group captures the behavior of traders. Traders are always more adventurous than investors, but investor support is required for any sustainable trend change.
The first feature is a rally and retreat pattern. This is shown in area 1. The rally moves into the long term GMMA but does not move above this group of averages. The retreat is relatively small. The most important information is the way the short term group of moving averages penetrate into the long term group. This penetration is enough to develop a flattening in the long term GMMA. This tells us that investors have stopped selling. They are not yet buyers, but they have stopped their selling pressure.
The second feature shown in area 2, is the rebound rally that carried the index above the upper edge of the long term GMMA. Additionally the long term GMMA begins to compress and turn upwards. This indicates that investors are becoming buyers and adding their tentative support to the new trend breakout.
Usually the next retreat uses the lower edge of the long term GMMA as a rebound point. This did not happen with the Nikkei, but the broad pattern of trend reversal remains in place. The retreat and rebound develops in area 3. The most important feature here is the way the long term GMMA acts as a support level. The long term GMMA is compressed and turning upwards. This shows a high level of agreement amongst investors. They are convinced this is a genuine trend change.
The next confirming feature is a separation in the long term GMMA. This indicates strong investor buying on any market pullback. This is the relationship analysts look for over the next few weeks.
A strong trend develops when there is a change in the balance between the behavior of traders and investors. A new uptrend is unsustainable until the investors stop selling – area 1 – and then begin to emerge as buyers – area 3.
The initial upside garget for the new trend is near 12,000. This is a strong historical support and resistance level so there is a higher probability of a consolidation period as the index approaches this level. If the long term GMMA is well separated at this time then there is a lower probability the consolidation area will act as trend reversal area.
The long term uptrend line can also be used to define the trend continuation. However this gives no information about the strength and sustainability of the trend.
The recent trending and GMMA activity is a confirmation of a long term change in the trend direction. It’s a long climb back to 18,000, and we do not expect that anytime soon. The 14,500 resistance level is the next major consolidation level above 12,000.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –. 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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