The Nikkei index has been on a tear since the US Presidential Election, trading up +22% since the end of October 2020. As one would expect, that move also drove a significant amount of bullish sentiment. Not only did Nikkei futures close at a staggering 93% Bulls on 01/08, but sentiment increased 18% Bulls over the past four days. While this may lead some to think a sharp drop in price is near, the historical data tells us we should expect to see even higher prices in the near term – let’s look at the data.

Here are the inputs we used when evaluating the sentiment data:

  • Nikkei sentiment = Above 90% Bulls
  • Four-day sentiment change in Nikkei = Between 16-20% Bulls

Since 2006, there have only been seven other times where we had a similar sentiment setup. Those dates were: 03/14/06, 05/07/13, 05/08/13, 12/09/16, 01/08/18, 05/27/20, and 05/28/20. The table below shows some key stats around those dates. Looking at that data, it’s clear to see this is a solid setup for the Bulls. It’s worth noting the best returns were seen between 5-11 trading days after the trade signal (averaged between 3.0-4.1% return).

The Setup

Here is how we’re placing our long trade:

  • Place a GTC Buy Limit order for $NK_F (Mar) at 2831.0
    • If this order isn’t filled by the close on 01/12, the trade is cancelled
  • Once that order is filled:
    • Place a GTC Sell Stop Loss order for $NK_F (Mar) at 2782.0 (-1.7%)
    • Place a GTC Sell Limit order for $NK_F (Mar) at 3006.0 (+6.2%)
  • *Special condition – if the trade is still open on 01/26, we will close the position at the close (regardless if it’s for a profit or loss)For this trade, we’re risking $2,450 to make $8,750 per contract (reward/risk of about 3.6).
Nikkei Index Futures

CONVICTION. EXECUTION. DISCIPLINE.

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