Charting Asia

Is this the Nikkei's last hurrah before the fall?

A pedestrian walks past an electronic stock board displaying a mid-day figure of the Nikkei 225 Stock Average outside a securities firm in Tokyo, Japan.
Tomohiro Ohsumi | Bloomberg | Getty Images

A weaker yen and positive economic indicators have pushed Japan's Nikkei to one-month highs but with the index well below its 2013 peak charts indicate the market is poised to fall.

The has developed a downtrend – trend line A which developed near the 16,232 high in December 2013 – and is testing support near 14,000.

This is a long-term trend reversal pattern that uses uptrend line B as resistance. Uptrend line B defined the uptrend starting in April 2013 and acted as support until January 2014. The Nikkei's fall below this trend line signaled a change in the uptrend, thus uptrend line B acted as resistance after January 2014, capping the index's rebound rise near 15,500.

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The rebound and retreat pattern confirmed the location of downtrend line A. A breakout above downtrend line A would be bullish; however this appears to be a low probability event. Any breakout has resistance near 14,800.

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 has been very useful in defining targets during the uptrend and will also help define the support targets for any retreat.

The critical level is 14,000; a fall below this level has a calculated downside target near 12,400. Historical support is near 12,500 so this is the preferred target. A move from 14,000 to 12,500 could be very rapid; this is the primary danger for long-side traders in the Nikkei. Traders who buy near 14,000 in anticipation of a rally rebound will need to use very tight stops.

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This is a market poised to fall. Strong resistance near 14,800 limits any breakout above downtrend line A. Any move below 14,000 will signal a short trade.

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.