Nikkei 225 Forecast: Record Rally Faces Correction as Oil Prices Jump

The Nikkei 225 rose last week due to the possibility of US-Iran peace deal and a surge in AI and semiconductor stocks. The Asian equity markets remain in a bullish momentum. But the energy crisis from the Middle East is creating short-term uncertainty. The Nikkei 225 corrected on Monday due to the positive turn in oil prices.

The chart below shows that the Nikkei 225 is trading in opposite direction to oil prices after the U.S.-Iran war. When WTI oil prices surged higher from the $70 level to mark a high at $120, the Nikkei 225 dropped from 60,000 to the 50,000 support area. However, when oil prices stabilized and dropped from $120 towards $80 in April, the Nikkei 225 surged after forming a bottom at 50,000 towards the 60,000 area.

This price behavior indicates that, despite strong volatility in the oil market, the Nikkei 225 was able to break the record level of 60,000 and trigger strong bullish price action.

Now, oil prices are again rising this week after forming support at $90, which is introducing a correction in the Nikkei 225 from the record 63,812 level.

Higher Energy Costs Pressure Japan but Tech Demand Supports Nikkei 225

The surge in oil prices poses a serious risk for Japan today, which imports the majority of its energy from the Middle East. The rise in oil prices can lead to rising costs for businesses, erode margins and dampen consumer spending. This may affect Japanese stocks and further weaken the financial system.

It’s the inflation channel that’s the primary driver of Nikkei. Rising energy prices can boost Japan’s import spending and add strain to companies and households. The impact of high energy prices was also observed on the latest inflation data. The chart below shows that inflation increased to 1.5% in March.

That’s significant because Japanese stocks have recovered sharply. High valuations are more difficult to justify when raw material costs go up. As the yen weakens, exporters will benefit, but so will import oil prices. Therefore, the Nikkei 225 may still be a good option. It will rise as global appetite for risk rises, although it could be more responsive to oil prices and Middle East news.

The correction on Monday may be considered as short term profit-taking. But the strong demand from the technology and AI sectors will keep the Japanese markets in bullish mode. The chart below shows that the semiconductor stocks have already broken the key levels. The stocks are looking for a continued positive move.

Nikkei 225 Technical Analysis: Bullish Structure Remains Intact

The daily chart for Nikkei 225 shows that the index remains in an ascending channel pattern. The index reached the target near the 65,000 level as discussed over the past few weeks.

However, the increase in oil prices may result in a correction in Nikkei 225 towards the 62,000 to 60,000 level before the next rally towards 65,000.

Despite this correction, the emergence of V-shaped recovery above 50,000 and then the strong bullish trend indicate that the index will be trending higher over the next few weeks.

The bullish structure in the Nikkei 225 is also evident on the 4-hour chart. The chart shows the formation of a rounding bottom pattern above the 50,000 area. After forming the rounding bottom, the index formed price compression pattern between 58,300 and 60,000. Therefore, the breakout above 60,000 indicates positive momentum.

Bottom Line

The Nikkei 225 is bullish despite the current sell-off driven by higher oil prices and Middle East concerns. If oil prices continue to increase, the overall structure should remain positive with the index re-testing the 62/60K support area. The bullish sentiment remains intact due to the breakout above 60,000, the strong recovery from 50,000 and the strength of the AIs and semiconductors. If major escalation in the U.S.-Iran conflict occurs or a long oil shock event develops, then profit-taking could occur prior to the next move up.