Nikkei Average rebound to test July high of 9,800 or June high of 10,250

- Japanese equity market—expecting rebound to continue in near term; move off bottom should be clear after Oct–Nov: On 1 September, the Nikkei Average fell to 8,796 and the TOPIX nearly dipped below 800, but they did not drop any further and have since started to rebound slightly. We think the indices did not fall as far as they might have because investor pessimism had already peaked, as suggested by the TSE’s short-selling ratio exceeding 30% on 1 and 2 September. We think the indices have likely entered a near-term rebound given that they have broken out of the diagonal triangle pattern on the chart that has been in place since April. If the yen appreciation that has impeded any market rally enters a more pronounced lull, we could see Japanese equities stage something of a rebound toward the rally highs of 14 July (9,807 for the Nikkei Average, 874 for the TOPIX) or 21 June (10,251 and 904). On the other hand, the wave count suggests that we are in a consolidation phase ahead of the next rally, and thus the market could remain in a broadly defined holding pattern until Oct–Nov. Only after this do we think it will become clear that equities have moved off their bottom.
- US equities—likely to trade in tight range until Oct–Nov: US equities have been regaining ground since 27 August. The three main indices have broken through the resistance line connecting 26 April and 9 August highs, and are now within sight of those same 9 August rally highs (10,719 for the DJIA, 1,129 for the S&P 500, 2,309 for the NASDAQ composite). A normal correction pattern based on wave count would point to the rebound from 27 August running out of steam, but if the three main indices regain their 9 August rally highs, it would add weight to the possibility that the correction phase ended with July lows (9,614 for the DJIA, 1,010 for the S&P 500, 2,061 for NASDAQ). Having said that, we make no major change to our view that US equities are likely to trade in a tight range until Oct–Nov, when the next four-month cyclical bottom is expected. Only after this do we think it will become clear that equities have moved off their bottom.
- Bond market—Japanese long-term interest rates heading for major bottom, followed by rebound; US long-term interest rates also heading for rebound off bottom: So long as the yield on newly issued 10-year JGBs does not fall sharply lower than the 25-day moving average (currently 1.02%), we think it will be fair to conclude that the yield of 0.895% on 25 August marked a major bottom. We think it is more likely to transition into an upward phase if it clearly breaks through resistance at the 1.15–1.19% level that has acted as a support line since 2004. We also think the yield on US 10-year T-Notes reached a bottom of 2.416% on 25 August. We expect yields to target the October 2009 low of 3.104%.
- Forex market—USD/JPY near to nine-month cyclical bottom, yen appreciation versus dollar in final phase; EUR/USD may have embarked on renewed upleg: USD/JPY is eyeing a drop below 83, but the chart suggests that the latest phase of yen appreciation versus the dollar may have entered its final phase. The nine-month cyclical bottom from the November 2009 low is approaching and technical indicators also suggest that the USD/JPY bottom is near. The diagonal triangle on the chart traced by the downtrend since May is now clearly visible, and we think the yen could be about to depreciate. In our view, USD/JPY could rebound to around 90 if large volumes of long yen speculative positions are unwound. The correction in EUR/USD from early August appears to have run its course and the rate may have already embarked on a renewed upleg.
- Commodity market—WTI crude oil prices could drop out of triangular holding pattern; COMEX gold futures could push on further from all-time high: WTI crude oil futures (front-month) have  oved into a triangular holding pattern, but wave count suggests that they are likely to fall south out of this pattern. If they were to fall below the key technical juncture of around $70–71, this could lead to further declines. Having reached an all-time high, we think COMEX gold futures (front-month) could push on toward $1,369/troy oz.

Nomura Technical Biweekly 20100916

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