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Where are Asian Stocks Headed? Watch Seoul: Chartist

Asia has an unexpected leading market. Since stocks in the region began their rally in 2009, South Korea's Kospi Index has quietly emerged as the so-called harbinger of market trends. While there are many theories why this is the case, I believe it is more useful to recognize the Kospi's role as a leader and use it to develop better trading strategies.

The Kospi is a forerunner of Asian markets in terms of its developmental behavior. It was the first market to stage a breakout rally last year, and the first to hit breakout targets. This creates a leaders-and-laggards strategy, where traders observe the leading market, develop appropriate trading strategies accordingly and apply those strategies to the lagging markets.

The weekly Kospi chart is dominated by a prolonged period of sideways movement. Support is near 1,530. Resistance is near 1,730. Trading within the band was characterized by steady rallies and some very fast retreats that retested the lower support level.

This range-bound trading, which is sometimes described as a rectangle, has the same consolidation pattern found in the Hang Seng, the Taiex, the Singapore Index and the Shanghai Index.

In late July, the Kospi developed a breakout pattern, after a brief retest of 1,730 as a support level, the rally continued smoothly towards 1,900.

A similar breakout developed at the start of October in the Hang Seng index. In Singapore, that happened in in mid-September. The Shanghai Index developed a breakout last week. The Taiex is lagging behind and has yet to develop this behavior.

If the Kospi develops a consolidation and a breakout, then the next upside target is a further projection of the original trading band. This gives a target near 2,100. This target is validated by previous peak highs and resistance levels. A Kospi breakout will tell the Hang Seng trader, for example, to hold positions as the index approaches 26,000, because there is the potential to continue to the next trading and projection target near 29,000.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC's Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

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.

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