Insights 
VT 
The Nikkei 225 index has broken out of an inverse head and shoulders pattern, indicating a positive upward trend. It surpasses its previous multi-month range with targets set near last year’s highs.
Current momentum remains positive, with objectives around 42,425 points and further projections near 44,300 points. The previous resistance level of 40,200 points could become short-term support.
Technical Indicators Support
The upward movement is reinforced as the daily MACD stays in positive territory, suggesting continued strength. Caution is advised as risks and uncertainties remain in financial markets.
Given the confirmed bullish pattern, we see an opportunity for traders to position for further gains. We would consider buying call options with strike prices aiming for those higher objectives. This allows for participation in the upside while defining risk to the premium paid.
This positive outlook is supported by substantial foreign capital, with overseas investors having poured over ¥6 trillion into Japanese stocks earlier this year. The persistently weak yen, recently trading near 34-year lows against the dollar, continues to make Japanese equities look like a bargain to international funds. This inflow provides fundamental fuel for the technical breakout.
However, traders must watch the Bank of Japan closely, as Governor Kazuo Ueda has expressed concerns that the weak yen could push inflation higher. Any hawkish shift or unexpected rate hike could quickly cool the market’s enthusiasm. We are monitoring wage growth data, which came in at a 2.1% increase in April, as a key factor in the central bank’s next decision.
Prudent Strategies for Traders
To balance this optimism with caution, we believe bull call spreads are a prudent strategy. This involves buying a call option and simultaneously selling a higher-strike call, which lowers the initial cost and caps potential risk. Using the new support level as a reference point for the lower strike provides a disciplined entry based on the chart.
The current momentum is also distinct from the past, as the index finally surpassed its 1989 bubble-era high on the back of real corporate governance reforms. Unlike previous rallies, this one is underpinned by a push from the Tokyo Stock Exchange for companies to improve shareholder returns. This fundamental shift suggests the upward trend could have more staying power.
