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A long-time line of resistance has turned to solid support for Japanese stocks.

One of the objectives of Sun Tzu’s Art of War philosophies is to transform one’s enemy’s strength into weakness -- and, thus, transform one’s own weakness into a strength. One might argue that the technical analysis version of this philosophy is “resistance, once broken, becomes support”. If we can make that reach, then the Japanese Nikkei 225 is executing the Art of War with military precision.

The recent generation in financial markets has seen 2 dominant trendlines. The first is the Down trendline stemming back to the early 1980′s in long-term U.S. Treasury Yields, which remains intact. The other was the Down trendline in the Japanese Nikkei 225 stock index, which contained the secular bear market since its blowoff top in 1990. We tracked the Nikkei trendline for decades as it served as impenetrable resistance at multiple major tops over that time.

3 years ago, the Nikkei was at long last able to break above the multi-decade resistance, as we noted at the time (Stick A Fork In The Nikkei’s 20-Year Downtrend). This was a monumental event for a number of reasons. First, it marked the end of an epic piece of charting analysis which served technicians well for decades. Secondly, it removed the obvious and formidible resistance that had held the index in check during that time, finally opening the door for substantial upside. Indeed, the Nikkei would follow through to the upside after the breakout, to the tune of about 30% over the next 7 months.

Lastly, the broken trendline also potentially transformed what was epic resistance into staunch support, i.e., a weakness into a strength. The first test of this “support theory” would come in February 2016 as the Nikkei, caught in the global equity selloff, lost all of its post-breakout gains and found itself testing the top of the broken trendline. As we posted at the time, the theory passed the test as the Nikkei bounced immediately up off of the trendline (Nikkei Passes 1st Test Of Broken Epic Trendline).

After a few months of a bounce, however, the Nikkei found itself headed south again. And by June, the index was again testing the top of the broken long-term trendline. In what appeared to be a key market juncture for Japanese equities, the question again, as we posted, was Will Epic Line Of Resistance Turn Support For Japanese Stocks?

While is was discouraging to see the trendline tested again so soon, we reminded readers that “the trendline was the dominant force upon Japanese equities for over 2 decades, so its potential role in supporting the index now should not dismissed.” Should, we continued, “the Nikkei hold the top of the broken trendline, it could well serve as a springboard to a substantial rally.”

Fast forward about 15 months and we see that the former Nikkei weakness did prove once again to be a newfound strength. The index ended up bouncing immediately off the broken trendline once again. And, as today’s Chart Of The Day shows, just closed at a 20-year high, breaking above its 2015 high.

So with the resistance-turned-support/weakness-turned-strength issue settled, the question now is -- is this move in Japanese equities for real?...like, for the long haul? Certainly this recent development is a big technical win for Japan. However, economically, fiscally and demographically, the nation definitely has its challenges. Where do we come down? In a premium post at The Lyons Share, we clearly choose a side -- and lay out the important support and resistance levels to watch.

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. TLS is currently running a 30th anniversary 1987 Crash Commemoration SALE, offering a discount of 22.6%, or the equivalent of the Dow’s 1-day drop 30 years ago. The SALE ends October 22 so considering the discounted cost and a potentially frothy market climate, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

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After successful tests of its broken multi-decade downtrend, Japan’s Nikkei 225 has a chance to commence a new upleg.

We’ve been pointing out the thinning nature of the stock market rally of late. In fact, as recently as yesterday we noted that just one of about 150 Dow Jones industries, Toys, was hitting a new high. And while the technology sector continues to make some strides, the stock rally is going to need an infusion of new fuel if the rally is to be perpetuated. One area of potential fuel could be international markets. We have seen a resurgence in various regions around the globe, including Latin America and emerging Asia. One more established market may also have an opportunity to join that mix: Japan.

Now we have been tracking the Japanese equity market for decades. Following the bursting of its bubble in 1990, Japan’s stock market went nowhere but down for the next 2 decades. In the process, one of Japan’s main stock indices, the Nikkei 225, formed one of the most epic trendlines of the modern era. This Down trendline stretched from 1991 until late 2014 when the Nikkei finally broke out above the trendline.

That breakout would see the index follow through to the tune of another roughly 25% by the summer of 2015. From there, the Nikkei commenced a pullback that would last for the next 12 months. Along the way, the average would test -- on 2 occasions -- the top of its broken multi-decade Down trendline. We covered these tests in February and June. Both times, the index would successfully hold above the trendline.

Our contention was that, given the dual successful tests of the epic broken trendline, the Japanese equity market had the potential to re-ignite its post-2012 bull market and begin a new, durable leg of advance. Of course, potential is nothing without action and the bounce in Japan’s stock market has been less than inspiring, so far. That said, the market has hit its stride a little bit just recently. However, this recent bounce has the Nikkei 225 testing its post-2015 Down trendline (on a log scale) at the moment.

This post-2015 Down trendline could pose at least a short-term obstacle for the Nikkei and we’ll assume the line holds until it doesn’t. If the index is able to break out above the line, it would suggest that a more durable intermediate-term rally may be in the works. It could also provide an influx of new fuel to a global equity rally that appears to be running out of gas.

That all remains to be seen. But as we have stated before, given the multi-decade secular bear market in Japan, followed by the break of the bear market downtrend and 2 successful tests of the breakout level, the potential for a longer-term bull market would appear to be in place, from a technical perspective.

First things first for the Nikkei, however, and that’s to rise above its post-2015 downtrend.

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More from Dana Lyons, JLFMI and My401kPro.

The Japanese Nikkei Index is testing the top of its broken decades-long trendline; will it be as reliable as support as it was as resistance?

It’s quickly shaping up as Trendline Week in the markets. And while that may not sound as cool as Shark Week, it can be pretty exciting for those of us who dwell in the charts. We say this on account of the myriad of significant trendlines that are being tested or breached this week across global markets (by the way, expect a special edition of Trendline Wednesday on Twitter tomorrow; follow us @JLyonsFundMgmt). Today’s version features one of the most prolific trendlines in the modern era, although it has certainly flown under the radar this past week given the tremors elsewhere in the world. We are talking about the decades-long Down trendline that held Japan’s Nikkei 225 in check following its blowoff top in 1990.

The trendline extended from the mid-1990′s until it was finally broken in October 2014, as we noted in a post back then. After popping higher by another 30% following its breakout, the Nikkei has settled back down since peaking last summer. In the equity selloff that gripped the globe early in the year, the Nikkei fell all the way down to test the top-side of the broken 20-year trendline. It successfully held back then, bouncing some 20% into April. Presently, the index finds itself again testing the top of the broken trendline.

So will the trendline hold again? We shall find out. On the one hand, it is a bit discouraging to see the trendline already being tested again given the considerable rally throughout much of the global equity world since February (minus the past few days, of course). If the recent Brexit-induced selling is the start of something more ominous and durable, the fact that the Nikkei is already testing this key potential support is not an positive development.

On the other hand, the trendline was the dominant force upon Japanese equities for over 2 decades, so its potential role in supporting the index now should not dismissed. We know many market observers will question whether Japan’s stock market can mount a longer-term rally in the face of potential headwinds elsewhere in the world. Specifically, should the secular bear markets re-engage in Europe and the U.S., would it still be possible for Japan’s market to rally?

The answer is, yes, anything is possible in markets, particularly when there is so much skepticism towards the possibility of a particular event. So it appears to be with respect to Japanese equities. Whether due to the county’s demographics, economic state or whatever, there seems to be no shortage of rationales for why it will be impossible for the Nikkei to rally. Don’t get us wrong, we are not making that prediction. We are simply saying it is possible.

Recall that the market languished badly during the 1990′s, even as most global equity markets were soaring. Furthermore, the Nikkei continued to make new lows into the 2008-2009 financial crisis, making it roughly 2 full decades of lower highs and lows. That is a brutal secular bear market that accomplished what secular bears are supposed to, i.e., remove the excessive conditions that existed at the end of the preceding secular bull market (e.g., P/E ratios dropped from around 90 in 1990 to the low teens).

Thus, Japan’s equity market is arguably in a position to support a durable, or secular, bull market. Whether it transpires or not we don’t know. What we do know is that investors  -- bulls and bears -- presently have a line in the sand, in the former trendline, that they can use to direct their investment posture. Should the Nikkei hold the top of the broken trendline, it could well serve as a springboard to a substantial rally. Should it break back below the line, the Nikkei could find itself back in the subterranean doldrums where it spent the better part of the past 2 decades.

We should get resolution on that shortly.

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More from Dana Lyons, JLFMI and My401kPro.

With all of the negativity directed at the economic and markets scene in Japan following yet another failed rally in 2013, it may surprise investors to learn that Japanese small caps are actually making an 8-year high:

While the Nikkei 225 and other more widely-followed large-cap Japanese indices have bounced off their recent lows, they still remain well below their 52-week highs. However, the small caps, as represented by the MSCI Japan Small Cap Index, are now breaking above the high set earlier this year. They still must contend with the high set in 2006; however, Japanese small caps are demonstrating superior relative strength at the moment.

FYI, here are couple ETF's in this space:

WisdomTree Japan SmallCap Dividend ($DFJ)