Nikkei 225 Forecast: Can Bulls Break 60,000 as Oil Prices Surge?

The Nikkei 225 began the week on a strong note with investors responding to the escalating tensions in the Middle East. The index increased despite the escalating conflict between the United States and Iran and heavy volatility in energy markets. That indicates that investors are not yet in panic mode. Nevertheless, the picture is still not that strong and the further performance of Japanese stocks will be largely dependent on whether oil prices continue to increase and whether the global risk appetite will begin to shrink.

Oil Shock Raises Pressure on Japan

Energy is the greatest threat to the Nikkei 225. Japan is a big importer of oil and therefore any sudden increase in the price of crude oil is likely to be a burden to the general economy. As Brent crude rose to over $95 and WTI oil reached close to $89, there is a clear reason for investors to remain on their toes. Higher oil prices increase the cost of fuel and transportation. They also put pressure on manufacturers, airlines, shippers and other sectors which rely on imported energy. If this trend persists, then the margins of the companies might come under pressure.

It is interesting to note that the Nikkei 225 has been trading opposite to the movements of oil prices since the beginning of the U.S.-Iran war.

The geopolitical uncertainty is growing rapidly. The capture of an Iranian-flagged ship and the threat of military action again by Washington threaten the escalation of a broader conflict around the Strait of Hormuz. That waterway is among the most significant oil transit ways across the world. Any additional interference there may drive crude prices even higher. In the case of the Nikkei 225, that would probably constrain the upside and heighten the volatility. But the index may be supported in the short run.

Why Nikkei 225 Remains Resilient

The Nikkei 225 was still positive despite these risks. That strength implies that investors are setting the oil shock off against other conducive factors. Asia-Pacific markets were generally on the upside, which contributed to the mood. Investors were not rushing to dump equities, as seen by gains in South Korea and regional stability. Japan also had the advantage that Wall Street had just closed the last session at record highs and both the S&P 500 and the Nasdaq were on a strong momentum. This good lead must have supported Japanese stocks in the early part of the session.

The second reason why the Nikkei 225 is performing well is that investors may still view Japan as relatively strong compared to other markets in case the conflict does not escalate. But that power has its limits. With oil continuing to soar, there will be inflation pressure and growth concerns will re-emerge. An even more difficult environment may be encountered by exporters in case the global demand falters and the risk sentiment becomes defensive.

Thus, the Nikkei 225 can maintain its strength in the short-term, but the scales are shifting. The index is expected to experience a more volatile and discriminatory market environment as long as energy prices are high and the Middle East tensions are not resolved.

Nikkei 225 Technical Analysis: Bulls Need Break Above 60,000

From a technical perspective, the Nikkei 225 hit the resistance level of 60,000 during the early opening on Monday. A break above 60,000 will indicate a strong surge in the Nikkei 225.

Based on recent price action over the last few days, the Nikkei 225 remains strongly bullish. But it must break above 60,000 to continue further upside. The chart shows that the recovery after the ceasefire has pushed the price within the ascending channel, which is the primary trend in the Nikkei 225.

As long as the index remains above 55,000-56,000, the next move will likely be towards 65,000. The RSI remains below 70, which indicates further upside potential. However, the next move in the index will likely be determined by the ceasefire developments between Iran and the U.S.

The 4-hour chart for the Nikkei 225 also shows a strong bullish structure by forming a rounding bottom pattern above the 50,000 level. A break above 60,000 is required to push the index higher. However, the 55,000-56,000 level remains the key support in the short term.

Final Take

The Nikkei 225 remains in a bullish formation, but the market is entering a more sensitive period. The emerging threat of increased tension in the Middle East and rising oil prices is currently the biggest threat to Japan. Therefore index can be volatile despite the overall trend being positive. Any break above 60,000 would indicate a positive move. Nevertheless, the 55,000 to 56,000 area is the most important area to monitor on a pullback. Until the index drops below 55,000, buyers will be in control. But the next big move will be determined by whether geopolitical risks dissipate or whether energy pressure continues to mount.