Nikkei 225 index rally hit a wall, but a bullish pattern has formed

on Dec 29, 2023
  • The Nikkei 225 index has found a strong wall at ¥33,794.
  • The index has rallied by more than 30% from its January low.
  • It has formed an inverted head and shoulders pattern on the daily chart.

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The Nikkei 225 index had a spectacular performance in 2023 as it surged to its highest point in over three decades. It jumped to a high of ¥33,795, which was over 30% above its lowest point in January. Similarly, the Topix index also roared as demand for Japanese stocks jumped. 

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A good year for Japanese stocks

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The Nikkei 225 index rallied in 2023 as part of the global stock market rally. It joined the rest of its global peers like the Nasdaq 100, S&P 500, and the DAX indices that also rose to record highs.

The surge in Japan stocks was sparked by an exciting trip by Warren Buffett to Japan earlier this year. In that trip, he talked with the leaders of the five sogo shoshas that he invested in a few years ago. He also decided to allocate more money in the companies.

As a result, more foreign money moved to Japanese stocks. According to the government, foreign investors bought stocks worth over $7.4 billion in November. To a large part, these investors believe that Japan stocks are severely undervalued compared to their global peers.

Japan has also emerged as a good alternative for global investors exiting China. As I wrote on Thursday, many foreign investors dumped over $33 billion of their Chinese stocks in 2023. Japan is seen as a safe haven, thanks to its friendly relations with Western and Eastern countries.

Further, the Nikkei 225 index surged because of the tumbling Japanese yen. The USD/JPY pair rose to 151 in November, up from 126 in January as the Bank of Japan maintained a dovish tone. Unlike other central banks like the Fed and the BoE, the BoJ has maintained negative rates. 

Many Japanese companies tend to benefit from a weak yen since it makes their exports more affordable. However, a weaker currency also hurts some companies, especially retailers who focus on imports.

The top-performing companies in the Nikkei 225 index were Kobe Steel, Advantest, Kawasaki Kaisen Kaisha, Tokyo Electric, and Mitsui Electric. Notable names like Softbank, Recruit Holdings, Hitachi, and Toyota also rallied.

Nikkei 225 index forecast

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Nikkei chart by TradingView

The daily chart shows that the Nikkei index had a strong performance this year. However, the index has hit a wall as it has struggled to move above the key resistance point at ¥33,794. It has failed to cross this level several times since June. The index has remained above the 50-day and 100-day Exponential Moving Averages (EMA).

At the same time, it has formed what looks like an inverted head and shoulders pattern. In price action analysis, this pattern is one of the most bullish signs in the market. This view will only be confirmed if the price moves above the neckline at ¥33,795.

Nikkei 225 Index Indices Stock Market Trading Ideas