The KOSPI is more important to the world than just cars, chips and kitchen appliances. The KOSPI is the leading indicator of Asian market performance. The technical features on the KOSPI Index set the strategy for trading tactics in Taiwan, Singapore and Hong Kong.
The dominant technical chart feature is the head and shoulder pattern. The neckline for the pattern is between the March lows and the June lows.
This pattern developed over 7 months. The distance between the neckline and the head is measured. This value is then projected downwards from the midpoint of the neckline to calculate the downside target. The target was near 1,680 and this was achieved in August.
The chart pattern target was a little below the historical support level for the KOSPI near 1720. This is significant because it is the historical support level that is most likely to exert the strongest influence on the market behavior.
The rebound from this target level used the historical support near 1900 as a resistance level. This creates the potential for a broad trading band between 1720 and 1900. This trading band is also used for additional calculations for upside and downside targets.
The width of the trading band is 180. An upside breakout above 1900 has a target near 2080. Historically this has represented a resistance level although in 2011 the index tended to oscillate around this value. A fall below 1720 has a downside target near 1540. This is an historical support level.
The movement of the KOSPI is constrained by these historical support and resistance levels. The most probable short-term outcome is a continuation of rapid rally and retreat behavior inside the trading band between 1720 and 1900. This pattern of behavior is most probable because the Guppy Multiple Moving Averagesindicator relationships show sustained selling pressure. This pressure must abate before a new uptrend breakout can develop.
The long term GMMA – shown as the red group of averages – show the thinking of investors. When this group is widely separated it suggests trend strength. In this case this band is sloping down and widely separated showing investors are sellers into any rally. Compression in this long-term group shows the selling pressure is dissipating. This is a necessary pre-condition for any successful breakout above 1900.
This type of breakout usually includes compression in the short-term GMMA as traders become more confident and drive the rallies higher. Until the gap between the short-term and long-term GMMA is closed then the KOSPI remains in a bearish environment. Not bearish in the sense of a move below 1720, but bearish in the sense that the selling pressure remains strong enough to cap any rally development into a sustained long-term uptrend.
The chart patterns provide an environment for analysis. The indicator relationships help track the behavior of investors and traders. These point the way towards a continuation of trading band consolidation with a gradual reduction in the level of volatility. This means slower rallies and retreats, which provide more manageable short-term trading solutions. Good for traders, but not so good for investors.
This pattern of behavior has the characteristics of an “L” shaped recovery. These typically take longer to develop but they usually produce a rapid breakout.
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.
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