After making a new high since December 2007, Nikkei 225 dropped -1,143 point or -7.3% on Thursday. Friday turned out to be no better with a yo-yo move. Though Nikkei gained +128 points, it was far lower than the 500 point gain that the index had intraday.

In two days, the index dropped -6.4% and saw massive volatility. So what’s up with it? Is it the start of a bad phase? Let’s put everything in perspective.

Firstly, Nikkei has been one of the best performing major stock indexes of 2013. As of today, it has been up +40.6% year-to-date. Since November 2012 – approximately seven months ago – it has been up by +63.7%. During this time it has not had any significant pull back. In mid-January 2013, Nikkei saw a pullback of -4.7% in eight trading days. In late March it saw a pullback of -7.2%, again in eight trading days. In mid-April, a three day pullback brought Nikkei down by only -4.7%. The Thursday’s drop is similar to all significant (or insignificant) pull back since the rally started in early November 2012. The only major difference is that this drop happened in one day whereas earlier pullbacks were spread out over 3-8 trading days.

Now there are various reasons of the so called ‘crash’ – profit taking being one of them. There are many pundits and analysts who are coming out with their own rationales. Some are persuasive and some are not.

Hedge fund manager Kyle Bass blames Macro Tourists for Nikkei’s fall, which Business Insider finds hilarious. One analyst calls it Lehman moment for Japan. This is hard to justify considering what was triggered world-wide after Lehman Brothers’ collapse in 2008.

One reasonable argument is that weakening factory activity in China.

In fact, Thursday’s Nikkei rout was triggered by weak factory activity data in China, Japan’s second-biggest export market, and on concerns sparked by Fed chief Ben Bernanke‘s suggestion that its bond-buying could be tapered this year.

Another reason, though a weak one, is the spiking interest rates fears.

Yields on 10-year Japanese government bonds have risen to 0.88 percent, nearly triple their April 5 low of 0.315 percent, just after the BOJ introduced its latest easing campaign

The increase in yields is still very small and takes it to only slightly above early 2013 levels. However, along with other reasons, increasing yields could spook the market as mentioned by Nomura’s Jens Nordvig, who gives three reasons for the one-day plunge – 1) weak closing of S&P 500 following confusing testimony of Chairman Bernanke; 2) Volatility in the JGB market; and 3) Weak Chinese PMI figures raising concerns about Asian growth.

On the other side is what will happen if the market continues to fall. Morgan Stanley thinks that in that case Prime Minister Abe and BOJ will most likely double down and deploy additional policy tools to support the economy and Abenomics.

But what are the charts saying?

The monthly chart of Nikkei 225 paints a very interesting picture. After making an all-time high in December 89 – January 90, Nikkei retreated sharply. Then from March 1992 to July 2000, it traded within a horizontal channel bounded by a high of 22,000 and a low of 13,000. It briefly moved back in this channel in late 2005 after breaking the down trend line from 1989 high. The financial crisis of 2008 arrested its move towards the upper limit of the channel and Nikkei fell along with all major world indices. See the monthly chart below.

It then tested the previous low, breaching it slightly before bottoming in 2009. The sharp rise since November 2012 has brought the index back above the lower limit of the horizontal channel of 90’s. Considering the type of resistance this lower limit creates, it is not surprising that the index is finding it tough to breakout.

Since the 1989 high, the 9-period monthly RSI has not spent much time either in the overbought region or in the oversold region. The first entry in the overbought region was cut short by the dotcom-bubble burst of 2000. The second journey was in August 2005 and lasted for about ten months during which time the index saw a decline of 20% from high-to-low before making a divergence in 2007, when the index made a high but the RSI did not. Presently the RSI is still rising and is not near the highs of 2005 or that of 1989 and 1986.

An analysis of weekly chart provides us with some more explanation. From April 2010 to December 2012, Nikkei traversed a descending triangle pattern. Generally it is a bearish chart pattern with a high likelihood of breaking below the lower bound. However, in late December 2012, Nikkei broke above the upper descending line, making it a busted-descending-triangle.

Since then the index has rocketed higher. In the process it blew past the measured-move target of descending triangle. The height of the triangle is approximately 3,200 points and the break-out point is approximately 10,100. The 1-to-1 moved will make a target of 13,300, which the index crossed in April. The 161.2% move makes the target to be 15,258, which the index crossed last week.

Another resistance is created by the 78.6% Fibonacci level of the fall from 2007 to 2009. The third resistance level is created by the high of 16107 made in the early December 2007.

Combining the analysis of monthly and weekly charts, it is natural that the index is facing some serious resistance. Coupled with oher reasons – weakening Chinese numbers, slight uptick in JGB yields, and fears about continuation of QE in the United States – the fact that Nikkei is pulling back is not surprising.

On the other side is the team of BOJ and the Abe Government, which is determined to get Japanese economy out of its prolonged slump. Abenomics has just started to show its result and there is no doubt that Prime Minister Abe and Governor Kuroda of BOJ are going to continue with their policies, which are going to continue propelling the Japanese stock market and weaken its currency.

The net result of these two opposing forces – technical resistance and the support from monetary and fiscal policies – is going to be a turbulent period for Nikkei 225 in the near future.