TOKYO, Dec 22 (Reuters) - Japan's Nikkei average is expected to test a fresh seven-month high on Wednesday, tracking gains in U.S. and European markets, but investors will likely be cautious about taking large positions before the year-end holidays.
The underlying market trend remains bullish as the Nikkei has rallied about 13 percent since early November, but the market may lack the energy to rise strongly as foreign investors have been less active, which has led to lower volume in recent sessions.
"The Nikkei will extend gains after rising convincingly yesterday, but it will be difficult to chase stocks strongly on rallies when volume is shrinking," said Hiroichi Nishi, general manager at Nikko Cordial Securities.
"Profit-taking will emerge on rallies as investors don't want to carry large positions during the holiday season."
Tokyo financial markets will be closed for a public holiday on Thursday.
Nikkei futures in Chicago closed at 10,420, up 0.7 percent from the Osaka close of 10,350.
The benchmark Nikkei will likely trade between 10,300 and 10,450, analysts said, after jumping 1.5 percent on Tuesday to a seven-month closing high of 10,370.53. That was the biggest daily percentage gain in almost three weeks.
U.S. stocks rose on Tuesday as solid earnings and a flurry of merger activity underpinned a steady upward trend that reinforced investor optimism for the coming year.
In Tokyo, resource-related shares, including shares of trading houses, are expected to gain support after U.S. crude oil futures rose above $90 per barrel, the highest intraday price in two weeks, analysts said.
Technical sentiment for the Nikkei could become stronger should it break through resistance of 10,420.74 -- the level where futures and options contracts expired in December settled earlier this month, they said.
STOCKS TO WATCH
-- Nippon Telegraph and Telephone Corp
Japan's Ministry of Finance plans to sell additional Nippon Telegraph and Telephone shares next fiscal year or so, for proceeds of about 300 billion yen ($3.58 billion), the Nikkei business daily reported.
-- Isuzu Motors Ltd
Isuzu Motors and General Motors Co will end their partnership in diesel engine development, an area where the Detroit-based automaker now plans to go it alone, the Nikkei business daily reported.
-- NTT Data Corp
NTT Data believes that its purchase of U.S. firm Keane Inc will push up pretax profit by about 9 billion yen ($107.3 million) in the financial year to March 2012, the Nikkei business daily reported.
-- Hitachi Metals Ltd
Hitachi Metals said on Tuesday it is in talks with Molycorp Inc to jointly produce rare earth metals in the United States where demand is seen rising in line with growth in the electric vehicle market. ($1=83.89 yen) (Reporting by Chikafumi Hodo; Editing by Chris Gallagher)