The Nikkei 225 futures (CME: NIY) mirrored Wall Street’s downturn during the Tuesday session and appears poised for its third consecutive day in negative territory. Recent retreats in US equities followed promising gains fuelled by expectations of potential rate cuts by the Federal Reserve. Japanese shares followed suit, reacting to the latest inflation data revealing that Japanese inflation has stayed above the 2% target for the 18th consecutive month.
Year-over-year Tokyo CPI decreased to 2.6% from the previous 3.3%, while Core CPI dropped from 2.7% to 2.3%, slightly below the anticipated 2.4%. Moreover, the Jibun Bank Composite PMI slipped into restrictive territory at 49.6 from the previous 50.5, hinting at a potential slowdown in the economy. While this might imply that the central bank could continue its ultra-loose policy, supporting the equity market, external risks persist. A recent surge in US treasury yields triggered a selloff in chip-related Japanese stocks, pushing futures to a 3-week low, making Friday’s US NFP report crucial for the global equity market.
Technical
On the 4H chart, the selling pressure broke through the dynamic support of a descending channel, crossing below the multiple SMAs in a sentiment shift toward the bearish side. Support at 32,830 failed to withhold the pressure, but the RSI indicates oversold conditions, which could signal a potential retracement.
The support-turned-resistance at 32,830 could be crucial in the upcoming sessions. If the futures can shift above this level, the retracement is possible toward 33,100. A prior demand zone could then offer resistance close to the 25-SMA (green line) and 100-SMA (orange line) at 33,250. Even if the futures manage to cross these levels, the 50-SMA resistance converges with the channel, offering a psychological level at 33,425, which could pose a challenge to the longer-term upside.
However, if the price fails to reverse above 32,830, the breakdown could be sustained toward 32,515. If the market fails to find buyers at this level, lower support at 32,635 could be a pivotal point before the retracement reaches the Fibonacci midpoint, which offers neckline support at 32,110.
Summary
As the US treasury yields advanced and reversed the gains in the equity market, the Nikkei 225 futures followed suit, breaking down the descending channel on the 4H chart. The resistance at 32,830 could be a key level to watch in the upcoming sessions to gauge whether the breakdown will be sustained or a reversal is imminent.
Sources: Koyfin, Tradingview
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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