Nasdaq’s bullish signal may deliver upside for the Nikkei 225

• Traders continue to buy the dip in Nasdaq 100 futures at the 50-day moving average
• A rapid bounce from there on Thursday generated a bullish technical signal
• Upside for US tech stocks often leads Japan’s Nikkei 225, especially if accompanied by yen weakness

The overview

Rising US bond yields are not generating headwinds for US tech stocks as seen in the past. While the Nasdaq 100 has broken its 2024 uptrend, traders continue to buy the dip, generating yet another bullish signal on Thursday. That points to potential upside for not only the Nasdaq but also Japan’s Nikkei 225.

Nasdaq 100 shows no fear to rising bond yields

Anyone who’s been watching markets recently would know the inverse relationship between US tech stocks and US bond yields is basically non-existent right now. Both have been pushing higher since the beginning of the year, confounding bears who believe tech should be trading lower as higher rates erode the value of what are expected to be substantial future earnings based on current valuations.

We saw that again on Thursday with Nasdaq 100 futures ripping despite US bond yields holding around 2024 highs, moving them to within striking distance of record levels. Numerous reasons were provided to explain the sudden surge, including the well-worn excuse it was driven by “earnings optimism”. Yeah, that’s code for we don’t know. One look at the Nasdaq 100 chart suggests technicals may have a stronger claim as the catalyst behind the rebound.

It reveals that after testing the 50-day moving average on Wednesday with big volumes going through, one final attempt to break lower failed early in Thursday’s session, giving bulls the green light to buy into the close. And buy they did, delivering a definitive bullish engulfing candle, pointing to a possible shift in direction higher.

While the divergence between the futures and RSI going back to late 2023 remains in place, the rebound has seen RSI moving to within striking distance of retesting the bearish trend. MACD also looks like it may soon crossover from below, potentially generating another bullish signal.

Where Nasdaq goes, Nikkei often follows

With potential upside looming for the Nasdaq, it may also lead to renewed gains in Nikkei 225 futures given the positive correlation between the two over the past quarter, sitting at a score of 0.83 on a daily timeframe. While it hasn’t been as strong over the past month, it’s noteworthy the relationship is strengthening again now the Japanese financial year has started.

With the Japanese yen hitting a fresh 34-year low against the US dollar this week, that’s another potential tailwind for the Nikkei given its positive relationship with USD/JPY over the past quarter, sitting at 0.75 on a daily timeframe.

Nikkei 225 futures are trading in a bull pennant pattern having entered from below, continuing to attract buyers on dips towards uptrend support and 50-day moving average which sits just below.

Trade ideas

Nasdaq 100

Those wanting to buy now following the bullish price action on Thursday should ensure they use a tight trailing stop to protect against reversal. The initial upside target would be the former record high. A break of that level points to a resumption of the rally.

Another option would be to wait for a pullback towards the 50DMA, allowing for long positions to be established above the level with a stop loss below for protection. The initial target would be the former record high. This option screens as the stronger setup given the improved risk-reward, although it does require downside first.

Nikkei 225

Momentum suggests downside risks for Nikkei futures remain despite the positives discussed above. Should we see the price move back towards uptrend support and 50DMA, traders can establish longs with a stop loss order below targeting a retest and potential break of the former record high. If the trade were to work in your favour your stop could be lifted to entry level or even higher.

The wildcards

The most obvious risk involving the Nikkei would be if the Bank of Japan were to intervene to support the Japanese yen. That would see the USD/JPY fall rapidly, a major downside catalyst for Japanese stocks given the strong correlation between the two and impact on exporter earnings.

-- Written by David Scutt

Follow David on Twitter @scutty