The Outlook for the Nikkei 225 June 2021

by at eToro.
Alistair Meadows
Alistair Meadows

In common with nearly all stock markets, the Japanese Index has had a strong rally since the lows of late March 2020. But in recent weeks, the upside appears to have stalled, held back a little of late by a strengthening Yen, which is perceived to have affected the prospects for the heavily export-dependent nation of Japan.

For the last 3 months the Nikkei 225 has gone nowhere, but now looks to be ready for another run up in the short term.

Nikkei 225 Daily June21

Nikkei Technical Analysis

The above chart looks clearly corrective in nature; often, after a strong run, (such as the 8000-point gain witnessed since November 2020), there is a pause, as investors wait for a new catalyst to emerge.

The most likely source would be a renewed weakening of the Yen, as this would likely fuel foreign buying of Japanese shares (as a weaker Yen makes Japanese exports cheaper), though a continued surge in US equities will also help bolster short term sentiment.

From a risk control perspective however, the problem for potential buyers is that the recent lows are a significant distance below current levels; at 27134, the low point is nearly 1500 points lower than current prices, leaving the risk/reward ratio relatively unattractive.

One solution might be to put the stop loss on a 2-day close below the recent closing lows of 27753. If the bullish market interpretation is correct, we can expect a move to at least test the upper trendline (above) to around 30,000 and if broken, a challenge of the 30750 level becomes probable, giving a better risk-reward ratio of between 1.4:1 and 2.4:1.

Ideally, we should see a small, well contained decline over the next few days preferably to no lower than 28000, to further support the “correction” thesis. That might be a little optimistic though- nonetheless, the lower the entry point, the better the risk/reward.

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