As the Strait of Hormuz is firmly closed again, the Nikkei found itself down 6% from its all-time highs. Technically, the key level to watch is ¥63,800 – above that, the path to further highs seems wide open. Below it, prices seem stuck between ¥60,000 and ¥63,800.
Nikkei 225 on the Daily Timeframe
From the daily timeframe, the outlook is neutral, price has tested the key level, but for now seems to be climbing back above it. The 4-hour timeframe, however, has a bit more of a worrying development, as we can clearly see a head-and-shoulders pattern having formed.
Furthermore, our key ¥63,800 level has become the neckline of that pattern. Extrapolating the distance between the top of the head and the neckline is what gives us a possible downside target of ¥58,900.
Nikkei 225 on the 4-hour Timeframe
Shorting equity markets is always challenging, as stocks generally move in the path of least resistance upward. This means that for a successful short, you often need multiple bearish factors to align. Take a look at the market just 2 weeks ago, for example: the Iran-US war was raging on, but the BoJ wasn’t hiking rates just yet, and the AI trade kept moving prices to new highs.
But now, that dynamic might be shifting. The Middle East conflict has re-escalated, the BoJ is set to hike rates on Monday, and the chart is showing a possible reversal signal. While none of this guarantees a market downturn, new highs next week have certainly become less likely.