During last week's trading the Nikkei 225 achieved almost exactly the target discussed here more than a month ago. The adjacent chart shows how the top of the cloud coincides exactly with the 50% retracement of the distance covered between the five year high and low for Japanese equities. The reason for this exact coincidence results from the method of calculating the key Ichimoku levels rendered on the chart. Senkou Span B - which is one of the two metrics from which the cloud is plotted - is derived from the highest high plus the lowest low over the preceding 52 periods. This calculation - given the 52 month period that has elapsed since the 2007 peak - will exactly coincide with the 50% fibonacci retracement.
Last Thursday (March 21st) the intraday peak level reached was at 12650 just 15 points beyond the level of coincidence seen on the chart.
The extraordinarily high inverse correlation between the yen and the Nikkei is very well documented and has been discussed in my commentaries frequently. From reviewing the weekly chart on USD/JPY the two most recent weekly candlestick formations give a strong hint that there could be some respite from a continually weakening yen in coming sessions.
Given the almost parabolic rise in USD/JPY since last November it is not easy to discern where to target a bout of yen strengthening might go, but a re-test of 90.86 level seen in late February is quite conceivable. In harmony with this move in the Japanese currency it would also be feasible to see the Nikkei retreat - possibly as far as the 38% retracement level around 11,300.
Macro risk aversion might well be a contributory driver to both a stronger yen and weaker Nikkei in the intermediate term, and in addition there could well be a challenge to the resolve of many large hedge funds that have become too complacent with large bearish yen bets.