Does Nikkei Hold Key To Where We Head Next?

Having come off the back of two successive days of gains, there does appear to be some semblance of stabilization in global markets. However, after two successive weeks of sharp declines, it is way too soon to call a short-term base for the moment, if some of the signals been given off by three of the major global benchmarks are any sort of guide.

While we’ve some decent rebounds in U.S. and European markets since the end of last week, it would appear that equity markets in Japan failed to get the message, as the Nikkei 225 slumped sharply today, despite it being closed on Monday.

From a technical point of view, this is a little worrying, as the Japanese index didn’t see anything of the rebound from the last two days. In terms of the lack of correlation, this sends a signal of declining confidence, particularly since the German DAX has already given up its long-term directional 200 day MA, at the beginning of the month.

The benchmark Japanese index is currently retesting its 200 day MA on the cash futures market having finished today’s trading session at 21,245. This 21,000 level is likely to be a key support level, which, if it gives way, could well signal further declines, and potentially drag the rest of the global equity space with it.

This level is also significant because it was a key barrier on the Nikkei’s move higher, as it also corresponds with the peaks in 2015.

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A subsequent daily close for the Nikkei 225 below these 2015 peaks would be a worrying indicator that momentum in global equites has shifted further towards the downside and leave the S&P 500 as the one remaining global benchmark still above its 200 day MA.

If we also look at how the S&P 500 and Nikkei have correlated since the beginning of 2017, there does appear to be some evidence of a decent correlation between the two, with the Nikkei 225 appearing to peak just before the S&P 500 did at the end of last month.

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For now, the S&P 500 remains well above its 200 day MA, currently at 2,545. However, if we see further risk aversion in the coming days and aren’t able to recover back above 2,700, we could well see another test of the lows seen at the beginning of this month.

It could well be that the Nikkei 225 holds the key as to where we go to next.