Technical Analysis – JP225 cash index correction could morph into a bearish trend

The JP225 cash index is on a streak of downward moves, dropping from the all-time high of 31,664 and it is currently a tad above the 30,711 level. This correction was not unexpected considering the aggressive nature of the recent upleg. However, the momentum indicators might point to a stronger downwards move, and not just a short-term correction.

The Average Directional Movement Index (ADX) is edging lower from its highest peak since the September 2021 rally. Usually, a drop from such high levels is associated with a reversal of the prevailing bullish trend. The stochastic oscillator could offer some assistance in signaling the start of a bearish trend. This indicator is still hovering inside its overbought (OB) territory, but it appears to be toppy. Therefore, the bears should be patient until it finally breaks below its OB region in order to jump on the bandwagon.

If the stochastic delivers a bearish signal, the bears would quickly like to break the 30,711 level and target the busier 29,734-29,967 area that is defined by the 23.6% Fibonacci retracement level of the March 8, 2022 – May 23, 2023 uptrend and the November 16, 2021 high. Even lower, the 28,976-29,229 area is key from a market sentiment perspective.

If the bulls decide to ignore the mixed technical signs, they will most likely have to keep the JP225 index above the 30,711 level. The next step would be to retest the May 23, 2023 high at 31,349 and try to match the all-time high of 31,664.

To sum up, even the JP225 index bulls accept the need for a short-term correction following the aggressive rally. However, they should remain on their toes as bearish evidence is mounting and the correction could quickly transform into a short-term bearish trend.

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