Kospi's Retreat A Warning Sign for the Region: Charts

South Korea's benchmark index has been an important barometer for the rest of Asia's markets, so a recent fall below the trend line of the Kospi is significant.

There are two conclusions we can draw from the chart.

GUPPY 1502.jpg

The first is the retreat from the previous all time high near 2100. The market moved above this but was unable to hold onto the gains. This is not a consolidation retreat in preparation for a breakout above the old 2100 high in 2007. The current retreat is much larger and more significant.

This duplicates the behavior of the Sensex which also failed to break past the previous 2007 highs. The Sensex and Nifty developed small head and shoulder patterns, but this does not appear on the Kospi .

The KOSPI is a regional leader in terms of market behavior so this failure suggests other markets – Taiwan, Singapore, Hong Kong – may also have difficulty in moving above the 2007 highs. This confirms the current retreats may also quickly develop end of trend characteristics.

The second conclusion is the failure of the primary trend line. This trend line starts in June 2010 and has been an accurate measure of the rising trend. This is the first break below the trend line. The break may turn out to be an overshoot followed by a rebound rally from just below the trend line value. However this is not just a break below the trend line value. It is also the first move in nine months below the lower edge of the short term group of moving averages. This signals a more significant adjustment to the trend. Traders will watch for similar patterns of behavior to develop in other regional markets.

The Straits Times index , the Hang Seng and the Taiex all show the same major break of defining uptrend lines. This is not just markets reacting to a common factor or news event. The break of significant trend lines in all these markets calls for a greater level of caution.

Clearly the 2100 level will now develop as a significant resistance feature, capping any rebound. There are three potential support areas for a retreat below the trend line.

The first is the trading band projection level near 1900. This was a minor support level during the rising trend. It was also calculated by measuring the width of the lower trading band and projecting it upwards. The double projection of this width gave the upside target near 2100. The first projection to 1900 gave a technical target level. Minor support did develop near this level and this also becomes the first support target for the current market retreat.

This double projection method using the trading bands has given accurate and reliable targets in other markets. The behavior in the KOSPI can be transferred to the behavior of other regional markets.

This KOSPI dip is also just below the upper edge of the long term group of moving averages in the Guppy Multiple Moving Averages Indicator. This long -erm group can act as a type of shock absorber, with the rate of fall slowing as the market enters this support area. This type of volatility pullback and test of the long term GMMA followed by a rebound has been an increasingly common feature of individual stocks in recent weeks. Traders will be ready to catch the rebound if this behavior pattern develops with the KOSPI. We discuss the trading methods in our Catching The Bounce DVD. This will also give traders advance warning of the behaviour in other regional markets.

Failure of support near 1900 has a downside target near 1720. The is the upper edge of the trading consolidation band that developed between August 2009 and July 2010.

It has been more common for the Kospi to lead regional market developments by several days. We still expect the Kospi to lead the way and show how markets will recover from this sharp sell-off.

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.

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.