Nikkei 225 index: Wyckoff method analysis screams, sell

Japan stocks continued their remarkable sell-off as government bond yields surged. The Nikkei 225 index plunged by more than 1.50% on Wednesday and reached a low of ¥31,500. It has collapsed by over 7% from the year-to-date high.

Japan stocks joined their global peers in a major sell-off as concerns about the economy worsened. On Wednesday, key American indices like the Dow Jones and the S&P 500 dropped by more than 1%.

A key concern among investors is in the bond market. The bond market turmoil that started a few months ago is continuing. The closely watched 30-year Treasury bond yield surged to 5%, the highest point since 2007.

The same bond crisis is happening in Japan, where the BoJ tweaked its yield curve control program in August. Data shows that the 10-year yield rose by 3.21% on Thursday and reached a high of 0.83%, the highest level since 2012.

Similarly, Japan’s 30-year bond yields rose by 1.13% to 1.78%, also the highest level since 2013. As a result, the Bank of Japan has been forced to intervene in the open market to prevent a deeper bond market sell off. 

The Nikkei 225 index also retreated after Japan published mixed economic data. According to the statistics agency, the country’s exports jumped to 4.3% in September from the previous 0.8%. Imports dropped by 16.3%, leading to a trade surplus of over 62.4 billion.

Additional data showed that foreigners bought Japan bonds worth over 794 billion yen in anticipation that the Bank of Japan will ultimately start hiking interest rates in the coming months. Foreigners invested over 1.2 trillion yen in Japanese stocks during the month.

Nikkei index chart by TradingView

The best way to look at the Nikkei 225 index is to use the concept of the Wyckoff Method. As shown above, we see that the index remained in a consolidation phase between March 2022 and March this year. We can see this as the accumulation phase of the method.

It then entered the markup phase, which happens when the demand is higher than the supply. Now, the index has moved into the distribution phase and formed a double-top pattern. It has also crashed below the 50-day and 100-day moving averages.

Therefore, the outlook for the index is bearish as it now moves into the markdown phase. The next key level to watch will be at ¥30,500, the lowest point on October 4th. A break below this level will see it drop to ¥29,216.

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