By Jim Donnelly
After a modest summer consolidation in the wake of an 8% sales tax hike, the Japanese Nikkei 225 Index now appears poised to break above long-term trend line resistance that currently sits at 16,110. Although gross domestic product fell by 6.8% in Q2 (due largely to the increased consumption tax), that decline was less than the generally expected 7% drop widely anticipated by a number of economists. Moreover, it does appear that there may be signs that a rebound in economic activity may already be underway with auto sales posting a 0.4% rise in June.
Interestingly, there are developing expectations that an additional 2% sales tax increase previously slated for implementation in 2015 could either be postponed or possibly shelved to insure that a robust recovery in GDP occurs over the next few quarters. Under such a scenario, some forecasters have already suggested that earnings per share could leap by as much as 11% to 12% next year for Nikkei 225 stocks which would, in all likelihood, bode well for equity prices.
In any event, a solid break above key downtrend resistance now at 16,110 on the Nikkei 225 (with follow through buying triggered afterwards) would be considered an important technical event, particularly since that downtrend has been nearly 20 years in the making.