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Nikkei Correlation

Published 09/10/2018, 01:10 pm
Updated 09/07/2023, 08:32 pm

Originally published by guppytraders.com

Coincidence in the markets can mean nothing, or it can provide a very useful trading edge. Looking at the chart you could be excused for thinking that this was the Dow for the period September 2017 to the current date. The behavioural characteristics are the same. However, this is the Nikkei 225 and it’s a spitting image of the Dow. Technically we apply the same analysis and reach the same conclusions that we would apply to the Dow even though most people would argue that the fundamental, political and economic situations are very different.

The first similarity in behaviour is the strong trend rise to a peak in January 2018. Then the market sold off very dramatically. The index dipped below the lower edge of the long term group of averages in the Guppy Multiple Moving Average indicator (GMMA).

This was followed by a rapid rebound and a period of sideways movement with a s light upward bias. In recent weeks both indexes have rallied strongly and retested the January 2017 highs.

Its not only the pattern of behaviour that is the same. The dates of the peak behaviour are the same. However, the detail of the daily index behaviour is different in the Nikkei and the Dow so we cannot use one index as a leading indicator of what will happen in the next day or so in the other index.

The GMMA trend in the Dow is stronger than the Nikkei trend, so there is a little more risk in the Nikkei. Dow trend strength is shown with the long term steady separation in the long term GMMA . Its confirmed by the behaviour of the short term GMMA which has not dipped into the long term GMMA. The Nikkei trend is more volatile with two substantial tests of the long term GMMA in April and September 2017.

The most important conclusions from this similarity in behaviour is that a continued breakout in the DOW will be replicated with a similar breakout behaviour in the Nikkei. Applying the same trade band projection methods to the Nikkei gives an upside target near 26300.

Of course, a Dow collapse would also be replicated by a Nikkei collapse. The risk comes in two ways. First its important to know which index leads in terms of behaviour. Logic would suggest it’s the larger market, the DOW so Nikkei traders will watch the Dow for advance indications of how the Nikkei may behave.

Second, this behavioural relationship tells us that holding open positions in the DOW and the Nikkei will not provide and safety often attributed to portfolio diversification because of the high level of behavioural correlation.

Despite this, the Nikkei is the better trading opportunity with a higher level of volatility and hence leverage. Low to high for the Nikkei is 18% compared with a 13% return from the Dow for the same behavioural move. The Nikkei and the Dow may be joined at the hip when it comes to behaviour, but the Nikkei is moving faster.

Nikkei 225 weekly

Daryl Guppy is a leading international financial technical analysis expert and special consultant to Axicorp. Guppy appears regularly on CNBC Asia and is known as "The Chart Man". Disclaimer: Daryl Guppy is not a financial advisor. These notes are for educational purposes only and provide an example of applied technical analysis.

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