Nikkei Blasts Off with Strong October Rally Amid Yen Weakness

The Nikkei has experienced a powerful rally to begin October, coinciding with renewed weakness in the yen. This move has been fueled by several factors, including the start of Japan's fiscal year and the technical picture.

A review of historical data found that there is no clear 'October effect' for the Nikkei, but strong starts to the month have often led to further gains throughout October. In fact, in three out of four instances where the Nikkei gained at least 1% on the first trading day of October, it went on to post further gains over the remainder of the month.

The yen's weakness has been a significant contributor to the rally, with its abrupt decline making it seem like the coordination between Japan's Finance Minister and US Treasury Secretary may have expired. The technical picture also suggests that bulls are in control, with the index breaking through key resistance levels and reclaiming support areas.

However, while the broader technical picture remains bullish, the risk-reward for chasing the current levels is becoming less attractive. A look back at previous instances where the RSI (14) and MACD were as elevated as they are now suggests that there may be a higher risk of a near-term pullback.