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Seoul Stocks to Rise Further Despite Politics: Charts

In 1962, the Soviets moved nuclear missiles towards Cuba, a few hundred kilometers from the U.S. coastline, and the world held its breath at the provocation.

Fast forward 50 years, a similar development is unfolding: North Korea has moved nuclear armed ships within a few kilometres of its Southern neighbor, which some argue it remains still technically at war with (There was no formal peace treaty to the Korean war, just a ceasefire), and within a short distance of its major ally China. The Korean markets started a slide that sent shivers through world markets. Currencies were the first to react, and the most volatile.

But is it an over-reaction? The weekly chart of the Seoul's benchmark Korea Composite Index (KOSPI) suggests the long term uptrend for the market remains intact. The retreat was exacerbated by the face-off between North and South, but, technically, the retreat was not unexpected. All other issues aside, this is significant because the KOSPI tends to lead the behavior of other regional Asian markets. A continuation of an established trend is bullish. A move below the established trend is bearish, and sends a warning signal to other markets to watch for similar change of trend signals.

The KOSPI chart has three main trend signals.

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The first is the movement between the trading bands. The burnout above 1,720 was a move to the upper-edge of a long-term trading consolidation band. The upside target was near 1,900. This target level was achieved and exceeded. The pullback in the last week is a return to the 1,900 projection level and is part of the rally-and-retreat retest process that follows a resistance-level breakout.

The second is the uptrend line that defines the breakout from the trading band. This line started in June and uses the lows of July and August as anchor points. The current market retreat is testing the support offered by this extended trend line. This is the normal behavior in a trend, even though the retreat may show greater than normal volatility. The value of the trend line is also the value of the lower edge of the short term Guppy Multiple Moving Average. This shows traders activity, and a dip to this level confirms this is a trading reaction.

The third feature is the long term GMMA which shows investor behavior. This is well separated, suggesting good support for the trend. The selloff last week did not cause compression in this group of averages. This suggests investors come into the market as buyers. The market can fall below the trend line and then use the long term GMMA as a support level. This is a significant retreat, but still within the context of a longer term uptrend.

There are strong uptrend continuation features in the KOSPI. This does not rule out some extreme down days, but it does not suggest the current activity is a precursor to a change in the trend direction. These retreats are a buying opportunity in anticipation of a rebound.

Of course the geo-political danger remains and that behavior cannot be charted, and traders should continue to monitor the situation closely.

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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