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How Far will Asia Go? Look to Kospi, Not Dow

Looks like the wish on your Christmas list this year could be for the Dow to go beyond 10,000, following today's breakthrough. But we look at the charts to find out just how important the Dow's renewed strength is to Asian markets.

Clearly, the break above the 10K mark is an important psychological barrier. Still, it comes with a significant warning.

The chart shows that the strongest historical support is near 10200. This is the area that will provide the strongest resistance and cap any rise from 9,000. This feature is enough to put a damper on the euphoria.

What’s 200 points between friends? Quite a bit when it comes to trading methods.

When it comes to trading methods, 200 points makes a big difference. It’s the difference between a rally trade and a trend trade. The high resistance level at 10200 suggests we can see a short term rally towards this level followed by a retreat and retest of support in the area near 10,000. The ability to hold support near 10,000 will reveal itself if this is:

  • a trend consolidation
  • an excited bullish exhaustion pattern
  • or a genuine continuation of the trend.

The breakout above 10,000 is not a surprise to chartists because the Dow shows an inverted head and shoulder pattern and its most clearly seen on the weekly chart. The target level is 11,600, well above the initial 10,200 resistance level.

China

Trend continuation in the Dow will push markets higher. In Asia, China will add to this tailwind push. These reactions will affect Hong Kong, Korea and Singapore. Watch the Shanghai Composite Index, with its powerful trend consolidation continuation pattern. It is less probable that the Shanghai index will break above 3000 in the current trend rally, but a move towards upside targets near 3400 is developing as part of the Shanghai consolidation pattern.

Korea

The key leading index that sets the scene for Asia is the Kospi.

Korea was the first market outside of China to develop a powerful rebound. This rebound pattern was duplicated later in Hong Kong, Taiwan and Singapore. Korea leads the way and its best seen on the weekly chart. The Kospi has retreated from resistance near 1720. It has developed a rebound from support near 1580. This small trading band is a consolidation level within the context of a strong rising trend. Its similar to the consolidation level and breakout hat developed between 1380 and 1440.

The Dow's break above 10, 000 provides tailwind strength to push the Kospi above 1720.

The market leadership provided by a breakout in the Shanghai market sets an upside resistance target near 1900. Asian markets have legs thanks to the Dow but it’s the Kospi that provides the best indication of just how far this breakout can propel the rally.

The powerful combination of the Dow pushing up and china's market leadership will propel Asian markets above current resistance levels. Asian markets have looks set to have a clear and long run to the next significant resistance levels.

Thing is, they can reach these levels with or without the Dow's impact. And that's something to look forward to this holiday season.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.

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  • Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.

Asia Economy