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KOSPI's Run-Up to Continue; Next Target 2250-2300

Sometimes it more useful to recognize relationships rather than attempt to explain them. The performance of the KOSPI is a case in point. There are two aspects of behavior, which point the way to wider profits in the ASEAN region. Just why these behaviors occur, and why the relationships have been established is a difficult question to answer.

There are multiple possibilities, none of which can be conclusively established. It is interesting to speculate on the reasons but it is more profitable to observe the repetition of the behavior and use that to make a profitable investment or trading decision.

The first observation is that the KOSPI leads the behavior of indices in the ASEAN region. When the KOSPI retreats then there is a high probability that the Hang Seng , the Straits Times Index and the TAIEX will also follow the same behavior. The degree of retreat may be different, but the behavior remains the same.

This is why the KOSPI breakout above the previous long-term double top high near 2,100 is important. It signals a continuation of a bullish uptrend on a region wide basis. Traders will now look for similar breakouts to develop in the TAIEX, the STI and the Hang Seng.

It doesn’t mean the breakouts will develop in the next few days. The behavior of the KOSPI is a leading indicator of behavior, so it suggests that there is increasing bullish pressure within the broader region.

This is a STI test of 3,300, a TAIEX test of 9,200, and an Hang Seng test of 25,000. Just as importantly, the behavior of the KOSPI suggests a breakout above these resistance levels is an uptrend continuation.

The second observation is the behavior of support and resistance in the KOSPI. The KOSPI moves between well-established support and resistance levels. These create trading bands that are about the same width. The KOSPI may move between these bands for a prolonged sideways movement, as from 2009 to mid 2010.

The breakout then moves to a projected target level that is calculated by projecting the width of the trading band upwards. The breakout from near 1,710 had a target near 1,910. The breakout above this level had a target near 2,100. These are not exact levels, but the measurement technique provides a useful target level.

There has been one important change. The previous target level near 2,100 is also the all time high for the KOSPI. The breakout above 2,100 takes the KOSPI into uncharted territory, or blue sky. The method of projecting the width of the trading bands is applied again to set the first of the upside targets for the KOSPI breakout. This is near 2,250 to 2,300.

The target is a small band because the historical double top near 2,085 is more significant than the previous trading and technical projections because it is validated by the market. The third feature of interest from a technical perspective is the change in the role of the uptrend line.

The fall below the uptrend line in late 2010 changed the role of the line. Prior to this it had been used as a support level. After the fall below the line, the trend line acted as a support level. The breakout above 2,100 and above the trend line now means the trend line acts as a support level. This change in the polarity of the trend line also supports a continuation of the bullish breakout towards the calculated upside targets.

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

Asia Economy