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Over the past two decades, it has paid quite well to sell the Nikkei at long-term trend line resistance as shown in the chart below. Coming into this year and throughout Q1 we had expected the Nikkei to retrace back to around its 20 month (sma) moving average, before making another attempt at finally shattering overhead resistance that has caged Japan’s equity markets. Although the performance gap is wide in the comparative study between the historic SPX (circa 1954) and the Nikkei today, we feel the prospective breakout in the Nikkei rhymes with the historic trend in the SPX – because of the linear regression bearings of the Nikkei’s long-term pattern.
The performance profile that we have followed of the Nikkei’s 1987 decline and recovery, places the retracement low in the markets rearview mirror. The 1987 high also marks the topside of the declining trend line resistance, as defined by the chart above.