Nikkei 225 Index is imploding today: will it rebound soon?

Japan stocks plummeted on Monday as investors embraced a risk-off sentiment amid the ongoing crisis in the Middle East. The blue-chip Nikkei 225 Index dropped by over 7%, reaching its lowest level since January 9 this year. It has moved into a correction after falling by over 10% from its highest point this year.

Nikkei 225 Index crash gains steam as energy shock continues

The Nikkei 225 Index continued its strong downward trend on Monday as investors focused on the ongoing oil shock. 

Data shows that crude oil prices continued soaring, with Brent and the West Texas Intermediate (WTI) soaring to over $115 for the first time in years. The two global benchmarks jumped by over 120% from their lowest levels this year.

Crude oil prices continued soaring as investors watched the ongoing demand and supply dynamics globally. 

Oil demand is expected to remain steady this year as some top producers like Qatar, Kuwait, Saudi Arabia, and Iraq slash production because of the ongoing challenges at the Strait of Hormuz.

Japan is highly exposed to an oil shock, especially when it comes from the Middle East, since it buys most of its oil and natural gas. Unlike the United States, Japan has no natural resources and relies on imports.

The rising energy prices will likely lead to a higher inflation in Japan and push the Bank of Japan (BoJ) to hike interest rates again this year. It has already hiked rates to the highest level in over 30 years.

The challenge, however, is that hiking interest rates now will impact economic growth. Macro data coming out on Tuesday is expected to show that the Japanese economy expanded by 1.2% in the fourth quarter after contracting by 2.6% in the previous quarter. 

The quarterly growth is expected to come in at 0.3%, higher than the 0.7% contraction in the previous quarter.

Most companies in the Nikkei 225 Index were in the red today. Furukawa Electric, a top Japanese utility, plunged by 16.80% as gas prices jumped. Resonac Holdings stock fell by 14.15%, while Mitsui Kinzoku's fell by 14%.

The other top laggards were companies like Fujikura, Advantest, Sumitomo Electric Industries, Fuji Electric, and Yaskawa Electric were among the top laggards as they plunged by over 11%.

Nikkei Index technical analysis 

The daily timeframe chart shows that the Nikkei 225 Index suffered a harsh reversal this month, moving from a high of ¥59,370 in February to the current ¥51,800.

It has dropped below the 23.6% Fibonacci Retracement level at ¥52,697. The index dropped below the 50-day Exponential Moving Average (EMA), while the Relative Strength Index is nearing the oversold level.

Therefore, the most likely Nikkei 225 Index forecast is moderately bearish, with the next key target being the 38.2% Fibonacci Retracement level at ¥48,520. 

However, there is a possibility that the index will bounce back later this week. With the US stock market plunging, Donald Trump will likely lower his rhetoric as he did in April last year when he implemented his reciprocal tariffs. This is important as Trump focuses closely on the stock market.