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During the recent worldwide stock rally, emerging market indexes have enjoyed greater gains than developed market indexes. One country’s index that has benefited from the rally in emerging markets is South Korea, but I question whether the rally in the Korean index can continue.
I used the iShares MSCI South Korea Capped ETF (NYSEArca: EWY) as a proxy for the Korean index as it is the easiest way for American investors to play the ups and downs of the Korean market. Looking at the daily chart of the South Korea ETF, we see that the fund has experienced a string of lower highs going back to last November.
We also see that both the daily stochastic readings as well as the 10-day RSI for the South Korea ETF are both at extremely overbought levels. The stochastic readings are at a level that has only been hit twice in the last year. The RSI is also at a level that it has only reached one previous time in the last year and that was back in October.
You might be thinking that when the daily oscillators reached these levels, the South Korea ETF didn’t immediately turn downward – and that is true. However, there is additional information on the weekly chart that makes me think the current rally is about to come to a halt.
What we see on the weekly chart of the South Korea ETF is a downward-sloped trend channel with the upper rail currently residing just overhead. In addition to the upper rail there is potential flat line resistance for the South Korea ETF at the $55 level from the high in November of last year.
The weekly oscillators aren’t in overbought territory, but they are in the upper half of their range and the 10-week RSI is close to its highest reading in the past year.
The EWY doesn’t move in lock-step with the Seoul Composite Index, but it is worth looking at the index and right now it is facing several possible layers of resistance at the 2030 level, then 2065 and then 2075.
From a fundamental perspective, the Korean economy has been slowing in recent quarters. The GDP growth rate in Q3 2015 was 1.2% and then it fell to 0.7% in the fourth quarter. It fell again in the first quarter of 2016 to 0.5%. This is not the type of economic backdrop that makes me think the equity market should be rallying the way it has over the last four months.
To me it seems as if the South Korean market is being lifted by the global rally, but isn’t as deserving as some of the other emerging markets. With the slowing growth in gross domestic product and the resistance on the charts, I look for the EWY to come to a peak soon.
With that thinking in mind, I would look to short the EWY above the $52 level with a downside target of $45 at the very least. The fund could reach as low as $43 in my book. Should the South Korea ETF move back above the $55 level, I would look to shut the trade down.
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