Korea : Current outlook from price patterns

[Starry]

I received quite a number of PMs and emails asking me what's exactly happening to Korea now. While there were many financial companies and fund houses boasting the cheap valuations of Korea, and hence making this country their best Asia bet, I am afraid the current technical picture of Korea doesn't look that rosy.

Korea is going through a technical correction now. Whether it will turn into a short-term bear market is yet to be known, but what is certain is the bearish sentiment shown by the Korea crowd now. To analyse, I will use a weekly chart instead of a daily chart so that we can analyse it from a longer term perspective. Refer to the chart below on the KOSPI index



From the chart above, the most important things to observe are the two trendlines. The two arrows show where the price break below the trendlines. From the MACD, there is also a negative divergence. It is interesting to note while the index went up to around the same level on Jan 06 and Jan 07, the MACD made a much lower high on Jan 07. Experience traders would have use the lower high of the MACD as a signal to get out while the index has reach the same level as in Jan 06.

The failure to beat the high of May 06 and the breakdown from the secondary trendline in Jan 07 clearly tell us that the bulls have exhausted. Volume has also been tapering off since Dec 06. Also, if you look at the right edge of the MACD, the fast line had just crossover the slow line from the top, hinting that there could be more downside to the index.

The question now is where will the index go from here? Let's now look at the daily chart



From the chart above, there is a strong support at 1350 or there about. Most technical analyst would have taken that 1350 as a support without questioning why. But if we go one step further and find out the reason why that level acted as a support, then we could probably predict the future behaviour of this crowd.

One way to go about looking for the reason why that level acted as a support is to look at its Fibonacci retracements. The chart below shows the various Fibonacci retracements level. For those who are not familiar with this term, Fibonacci retracements are the physchological levels based on the rules of nature. Whether is this a mystic science or not I don't know, but Fibonacci retracements have been used for quite awhile and it does work quite well to explain certain support and resistance level



From the chart above, you can see why 1350 acted as a support. That level falls onto one of the retracement lines. If we follow this argument, you can expect Korea to have another support at 1320 and probably a strong one at 1300. If it drops below 1200, then a bear market for Korea could be in the making.

Korea is a concern because it is the top country for many Asia Pac and Emerging market funds. Fundamentally it is very sound, but market can be irrational for a long time. If you are the buy and hold type, just do nothing (you are probably well diversified, so nothing to worry here). But if you are not that type, then re-valuate your funds and make sure that Korea is not overexpose by having too many Asia-Pac, Emerging markets or even Asia Tech funds. Too many newbies fall into the trap of overexposing themselves to Korea. Some may have place big bets on Korea. Whatever it is, this could be the time you look into your countries exposure and make sure they are well diversified or at least not "accidentally" overexpose to Korea.

[snowcrash]

Wow. Great stuff. Thanks, Starry, for doing this !!!

[Rational Investor]

oh yes... very well done.
I held korea via unit trust before but i completely sold out in march 2006.

[Starry]

oh yes... very well done.
I held korea via unit trust before but i completely sold out in march 2006.

I don't hold single country funds. But I did bought into single Thailand after the second fall recently using some speculative money because the technical indicators for SETI was screaming an overwhelming buy.

I think the second market that might just fall into a technical correction is Taiwan.

Nikkei is having big issues with 17500 level. The longer it couldn't break it, the more the bulls will get exhausted.

The one which is really strong is STI

[Rational Investor]

hmmm.... didn't know you bought into thailand recently. What a coincidence that even before i knew of this, we independently decided to add into the same single country at roughly the same time

[songlip]

Starry,
Thanks for the excellant TA! Hope you dun get too many hate mails and threats from psycho fans out there!

[choozm]

Seldom see analysis with something objective like the last paragraph. Gook work though I know nuts about the charts.

[joveyb]

Starry,

Maybe you can start a post on how to read TA.

[Starry]

Starry,

Maybe you can start a post on how to read TA.

err..this one is a very big topic by itself.

[Starry]

hmmm.... didn't know you bought into thailand recently. What a coincidence that even before i knew of this, we independently decided to add into the same single country at roughly the same time

Thailand have to watch carefully. Some people I talk to expect Thailand to bounce back to the level before the capital controls were annouced in a short time. That's not realistic.

If a person fell down from a flight of stairs, he could probably get up, dust himself a little and run back up again. But if that guy jump off his 3rd storey window, then obviously he will need some time to recover before going back up. Same with markets.

Anyway, let's not go OT here. We can continue on this over at the Thailnd thread.

[TBFF]

Thanks Starry! I'm printing it out to slowly digest it tonight!

[wilfredling]

Starry,

Well done!

[sonicdeejay]

I will definitelygo thru the article a-to-z... It must be a rare learning treasure for a newbie like me..

[globevestor]

Excellent article. Besides RSI, MACD, Fib ratios, I also use market breadth information and actions of foreign players[a.k.a smart money] and local retail investors(a.k.a dumb money) to gauge strength of an index. For an up tick in an index, I will feel more confident of more up ticks in the near future if the up tick is supported by good market breadth, e.g. up stocks/down stocks or up volumes/down volumes of 2 or higher, or the up tick is supported foreign players, e.g. buying by foreign players while local retail investors are selling. For Korea market, you can get investor action information from Woori website and market breadth information from Korea Exchange website. As an example, if you refer to the attached chart for KOSPI investor actions and daily KOSPI chart posted earlier, the up ticks of KOSPI in Oct 06 are supported by foreign players while up ticks in Dec 06 are not supported by foreign players. Therefore up momentum in Oct 06 was carried over to Nov 06 but up momentum in Dec 06 is not sustainable. If you are interested in market breadth information for other countries, click here.

[bochap]

Starry,

don't know if you answered this before but where did you get all the charts generated with all the lines? u draw those lines yourself?

[penumbra]

hmm.. my exposure on korea had been diluted to 10% with fresh injection into emerging europe and thailand earlier this month. i am not going to bother myself with the fate of korea. i will let my various asia pacific fund managers do the worrying/thinking. i have to thank starry for the chart though. i will withhold further investment into korea for the time being.

[DIY]

thanks Starry once again for the technical analysis.

Will be watching korea closely for the next few weeks to see whether it is time to top up more.

[Starry]

Starry,

don't know if you answered this before but where did you get all the charts generated with all the lines? u draw those lines yourself?

charts are from stockcharts.com

Some of the lines were drawn myself using their annotation feature. In the past, I used to screenshot the chart, paste it into Paintshop and draw the lines there.

But for Fibonacci retracement lines, those are from their annotation feature.

[sonicdeejay]

dear starry,,
can do TA on japan..for the next article???

[joveyb]

Starry already had a TA on Japan a year ago

[joveyb]

And his prediction on Japan is oustanding. Japan has
yet to break the resistance level of R1. Cool Starry.
But I have this feeling that Japan will break the resistance
of R1 in the year 2007. I think Japan will go to 20k

[Starry]

thanks Starry once again for the technical analysis.

Will be watching korea closely for the next few weeks to see whether it is time to top up more.

The double bottom at 1350 is a good sign of a strong support. But I wouldn't be optimistic with Korea unless it breaks 1450, which is the high they made in May 06.

[lcy]

kudos to starry yet again for this analysis.. anyway i had followed your judgement on the Japan which you did a while back and i must say its been acccurate so far! As for this analysis on Korea, actually i had been wanting to jump back in after switching to Msia funds from korea funds 2 mths back. Now i guess i will just hold on before going in again..

[Hulumas]

Dear Starry,

This time, it is really a Korean market TA that cannot be observed out, marvellous job!!! I make my decision instantly to buy single Korean country fund tomorrow!!!

[Rational Investor]

oh... in that case.... the only rational thing is to follow suit?