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South Korea Finds Its Footing

Tuesday, 27 May 2008 | 1:45 AM ET

2007 was an amazing year for the South Korean stock market. The Korea Composite Stock Price Index, or KOSPI, closed the year with a 32.3 percent gain at 1,820.82. And then came 2008.

The year of the rat hasn't been a very auspicious one for the KOSPI. In the first quarter, the index lost as much as 16 percent of its value, following along the lines of regional Asian markets. But things have been looking brighter for the KOSPI since its nadir in March, with the index paring back losses. It's now down 4 percent year-to-date.

The trend breakout in the KOSPI has been strong, though it has now developed a small top-out and retreat pattern. The key features with the KOSPI are the strength of the underlying trend. This is defined by the relationship between the short term and long term Guppy Multiple Moving Averages (GMMA) display.

The short-term GMMA, in blue, has remained well separated until recently. The index activity is clustered on the upper edges of the short-term GMMA and this shows considerable trend strength. The pullback that developed in April was not strong enough to move below the short-term GMMA. This tells us that traders moved quickly into the market to take advantage of lower prices. The current pullback has dropped below the short-term GMMA group of averages.

Traders are now looking at the long-term GMMA group, in red, to provide support and a rebound level. This strong trend is also supported by the long-term GMMA group of averages which is indicative of investor behavior.

As the trading pullbacks developed we see no compression in the long-term GMMA. This suggests that investors are also aggressively moving into the market as buyers. They see an index pullback as a buying opportunity.

This reaction is continuing. The long-term GMMA has not compressed in reaction to the more substantial pullback in the last week. This reaction confirms investor buying.

This trend strength, with its lack of previous definitive retreats means that it is difficult to accurately draw a reliable trend line. Traders look for a significant retracement, such as the one currently developing, and use the lower edge of this to draw the trend line. When two or three of these rebounds have developed we can apply more confident trend line analysis.

The immediate resistance level for this initial uptrend is near 1,920. The current reaction away from this area confirms its strength as a resistance level. The rebound challenge to this area will provide a good indication of long term trend strength. This is a broad area which has acted both as support and resistance in the past and increases the probability of a consolidation uptrend developing in this region. This is a pause in the trend rather than a strong potential for a trend reversal.

The resistance level at 2,020 is based on the high in June 2007. This is an indicative resistance level. It was not a barrier to index rises in October or November 2007. This suggests that once the index is above 1,920 that there are limited restraints to good trend continuation.

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