As we predicted in the last couple of days, Nikkei was headed for a test of the 10.000. This took place in today’s session when the index closed at the day’s high 10.160.
The Bank of Japan will announce its monetary policy decision tomorrow and markets expect a looser one, especially as the new Prime Minister requested BoJ to adopt a higher inflation target (from 1% to 2%) in a desperate effort to fight deflation.
Initially, BoJ could likely respond with increased purchases of Japanese government debt (the way the US, the ECB and the Bank of England do it). It is actually a form of printing money to buy the crap debt and lower long term rates.
The first resistance for Nikkei is located at 10.200. It is where two rallies stopped (in July 2011 and March 2012). If the current rally ends at 10.200 support could be found at 9.000.
The longer-term resistance is at 10.600 and dates back to February 2011. It will be hard for the market to penetrate this resistance in the first attempt. If the rally ends at 10.600, first support is at 10.200 (old resistance turning to support).
A possible scenario is a week long consolidation between 10.200 and 10.600 before the 10.600 resistance is effectively broken.
It will be interesting to see the market response tomorrow. It is likely that the market sells at the news as it seems that monetary easing has been priced in already to a great extent.