Charting Asia

For Nikkei, 14,000 remains the critical level


Come April, when Japan's sales tax rises to 8 percent from 5 percent, a large cup of Starbucks green tea in could jump to 572 yen from 550 yen. The price will fall to 530 yen with the sales tax completely excluded. And of course, retailers can choose to absorb none, some or all of the tax.

In the same vein, the Nikkei chart has well-defined upper limits and downside targets.

(Read more: Is the BOJ at its limits?)

The chart is dominated by two features. The first feature is the uptrend line that defined the rising trend which started in April 2013. This trend line acted as a support level until January 2014. The fall below the trend line signaled a change in the nature of the uptrend. After January 2014 the uptrend line acted as a resistance level. This caps any future index rises with the current upside target near 15500.

The second feature is the series of historical support and resistance lines. The placement of these areas is calculated by projecting the width of the historical trading band. The distance between support line 1 and 2 is measured. This is projected upwards to give support line 3 near 14000. 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 level is 14000. A fall below this level has a calculated downside target near 12400. Historical support is near 12500 so this is the preferred target. A move from 14000 to 12500 can be a very rapid fall and this is the primary danger for long side traders in the Nikkei. Traders who buy near 14000 in anticipation of a rally rebound will need to use very tight stops because a fall below 14000 can move very rapidly towards 12500.

(Read more: Can Japan's rally continue without a third arrow?)

Bottom line: The Nikkei chart suggests that consolidation in Japanese stocks will continue between 14000 and 14700 as the increase in consumption tax comes into effect.

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.