Will the Nikkei have enough strength to continue its ascent?

Japan's Nikkei stock market index, along with its US and European counterparts, continues to bounce up from its May lows. But the downtrend from last year's autumn high at 30640 again blocks the way. The previous attempt to break through the trend upwards, made at the end of March, failed. But unlike the US indices, the Nikkei did not make the new annual lows, showing a little more stability. Will a new attempt to break the downtrend be successful?

The Japanese stock market receives significant support from the weakness of the yen - in relation to most major world currencies, the yen is at multi-year lows. The cheaper the national currency is, the more profit Japanese companies get from exports. And the more profitable the exports, the better the financial results of the companies that form the basis of the Nikkei index.

Macroeconomic statistics have shown some improvement lately, with a drop in unemployment to 2.5% and a 2.9% rise in retail sales announced this week. However, there are also problems, the main one is inflation.

April price growth in Japan accelerated to 2.5% and so far it does not look threatening, especially in comparison with statistics from the USA, Great Britain or the European Union. But inflation should not be underestimated. Those countries that made a similar mistake earlier are now forced to sharply raise interest rates, reducing future economic growth at the same time. And negative economic forecasts are hitting stock markets hard.

So, the Nikkei came to the downtrend line, starting to breakout upwards. However, unlike the March case, RSI has not been overbought yet, and reversal patterns have not yet been formed on the chart. Therefore, at the moment there is a fairly high probability of overcoming the trend line. However, the breakout of the trend may turn out to be false, and the opportunity for a profitable sale of the Nikkei will appear in the near future.

Following trading strategy options can be offered:

1) Sell Nikkei today at the current price. Take profit – 26200. Stop loss – 28430.

2) Sell Nikkei next week (not above the level of 28050). It is worth waiting for the reversal patterns on the chart or on the RSI indicator to reduce risks. Take profit - 26200. Stop loss – 28430.

Also, traders, at their discretion, can use Trailing stop instead of a fixed Stop loss.