Nikkei 225: bullish pattern emerges as Kioxia stock, Japan bond yields jump

The Nikkei 225 Index traded sideways on July 8 as artificial intelligence (AI) stocks rebounded after Tuesday's sharp sell-off.

The index was trading at 66,800, about 7% below its highest level this year.

Despite the recent weakness, it has formed a highly bullish technical pattern, signaling that a rebound could be on the horizon.

Kioxia, Softbank, and top AI stocks rebound

The Nikkei 225 Index wavered, even as top AI stocks that plunged on Tuesday attempted to bounce back.

Kioxia, the biggest Japanese company by market cap, jumped by 3.5%, mirroring the gains in other memory companies like Samsung and SK Hynix.

These stocks plunged a day earlier as investors reacted to Samsung’s preliminary earnings report. 

Softbank, which has invested billions of dollars in the AI industry, jumped by 1.3%, while Tokyo Electron rose by 1%. Other AI stocks like Advantest and Murata Manufacturing were up modestly.

AI stocks have been highly volatile in the past few weeks as some investors start to book profits after a remarkable bull run.

For example, at its peak this year, Kioxia was up by nearly 5,000% from its lowest level last year, a notable development for a company that was on the verge of bankruptcy a few years ago.

Analysts are cautioning that companies in the memory and semiconductor industries may experience a sharp pullback.

In a Monday interview, Morgan Stanley’s Mike Wilson predicted that there will be a sector rotation from semiconductors to hyperscalers. 

A key concern is whether the memory industry will continue growing as it is doing today.

Also, there are concerns about whether the US government will allow Apple to buy memory products from Chinese manufacturers. 

Japanese bond yields jump amid BoJ independence fears

Moving the Nikkei 225 Index is rising Japan’s government bond yields, which continue rising this week.

TradingView data shows that the ten-year yield jumped to 2.86%. The five-year yield rose to 1.98%, while the 30-year rose to 3.98%. 

These yields have jumped as investors anticipate the next action by the BoJ to cap the falling Japanese yen. The USD/JPY pair rose to 162.36, a few points below the year-to-date high of 162.8. It is now hovering near the highest level in over four decades.

A potential remedy would be several interest rate hikes to bridge the gap between the US and Japan rates. Still, it is unclear how high the bank is prepared to go because of Japan's elevated public debt.

Meanwhile, there are also concerns about the BoJ’s independence.

According to Reuters, the government is considering revising language on monetary policy in its economic blueprint. This is happening due to fears that it is infringing on its independence.

Nikkei 225 Index technical analysis

NI225 chart | Source: TradingView

Technicals suggest that the Nikkei 225 Index may rebound in the near term. The index has found support at its 50-day weighted moving average (WMA). At the same time, it has formed both a falling wedge and a bullish pennant pattern, which are commonly viewed as bullish reversal signals.

Therefore, a rebound may see the index rise to the year-to-date high of 72,748. On the other hand, a drop below the key support of 65,000 will point to more downside.