The Nikkei 225 index has broken free from an inverse head and shoulders pattern, showing a positive upward trend. It has moved past a multi-month trading range, with targets close to last year’s highs. The current momentum is strong, aiming for around 42,425 points and possibly reaching 44,300 points. The previous resistance level at 40,200 points may now serve as short-term support.

Technical Indicators Supporting the Trend

The upward trend is supported by the daily MACD remaining in positive territory, indicating ongoing strength. However, caution is necessary due to existing risks and uncertainties in financial markets. With this confirmed bullish pattern, traders have a chance to capture more gains. We recommend buying call options with strike prices focused on these higher targets. This approach allows participation in the upward movement while managing the risk to the premium paid. This optimistic outlook is also backed by significant foreign investment, as international investors have invested over ¥6 trillion in Japanese stocks this year. The weak yen, trading near 34-year lows against the dollar, makes Japanese stocks attractive to global funds. This influx of capital provides strong support for the technical breakout. Traders should keep an eye on the Bank of Japan. Governor Kazuo Ueda has noted that the weak yen could lead to higher inflation. Any shift in policy or unexpected rate hike could dampen market enthusiasm. We are also watching wage growth data, which showed a 2.1% increase in April, as it could influence the central bank’s next decision.

Wise Strategies for Traders

To balance optimism with caution, we suggest using bull call spreads. This involves buying a call option and selling a higher-strike call at the same time, which reduces the initial cost and limits potential risk. Using the new support level for the lower strike gives traders a disciplined entry based on the chart. The current momentum is different from previous trends, as the index has finally exceeded its 1989 bubble-era high due to real corporate governance reforms. Unlike past rallies, this one is backed by the Tokyo Stock Exchange encouraging companies to enhance shareholder returns. This fundamental change suggests the upward trend could be more sustainable. Create your live VT Markets account and start trading now.

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