Nikkei 225 Forecast as it Crashes Into a Correction Zone

Summary:
• The Nikkei 225 index crashed into a bear zone as investors reacted to the rising crude oil prices and the country’s new president.

The Nikkei 225 index crashed into a bear zone as investors reacted to the rising crude oil prices and the country’s new president. The index crashed to ¥27,507, which was more than 10% below the highest level this year. A drop by 10% from the highest point is known as a correction while one below 20% is known as a bear territory. 

Why the Nikkei index crashed 

The Nikkei 225 index declined sharply mostly because of the overall performance of other comparable indices. For example, the Dow Jones index declined by more than 500 points on Monday while the Nasdaq 100 index tumbled by more than 300 points. 

Investors are basically worried about the impact of higher crude oil prices on the global economy. The price of Brent jumped to more than $82 in the overnight session after OPEC+ left its supply increases intact. The cartel will increase production by more than 400k barrels per month until 2022. At the same time, the prices of key commodities like coal have all slumped. 

The index also declined after Japan got a new prime minister. Fumio Kishida took office as the new prime minister on Monday. He replaced Yoshihide Suga, who resigned. 

The worst performer in the Nikkei 100 was Fast Retailing, one of the biggest fashion retailers in the country. It was followed by Z Holdings, the company controlled by Softbank whose shares fell by more than 5.5%. The company owns Yahoo Japan, Line, and PayPay. 

Other worst performers in the index were Sumitomo Dainippon, Casio Computer, Terumo, and Fuji Electric. 

On the other hand, the best performers in the Nikkei index were Inpex, Sijitz, Tokyo Electric Power, and Asahi Group. 

Nikkei 225 forecast 

The daily chart shows that the Nikkei 225 index has been in a tight range in the past few months. The index has remained between the key support level at ¥26,942 and the resistance at ¥30,515. 

The index declined sharply on Monday and briefly entered the correction zone. It has moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved close to the oversold level at 30.

Therefore, for now, I don’t see any bullish catalyst that will push the index higher. As such, there is a likelihood that it will continue dropping. A significant bearish breakout will be validated if the price moves below the key support level at ¥26,942.

On the flip side, a move above the resistance at ¥28,500 will invalidate the bearish view.