Pressure to ease as South Korean shares advance

Slower global growth and declining inflation adds pressure on the Bank of Korea to cut interest rates. If the Korean Won depreciates due to lower rates, a boost to exports could follow, which will add further support for Korean equities.

South Korea has joined the Asian stock market rally. The top chart shows a bullish advance in the South Korea iShares ETF (EWY). A pull-back is likely, which could offer opportunity to build positions.

The recent move is supported by improving momentum as the MACD turned positive. The most recent positive inflection occurred near the 2013 bottom in EWY. The MACD histogram (blue bars) is more sensitive to price changes within the longer trend, thereby providing an early signal of an advance at the start of 2015.

The last panel offers confirmation from the Chaikin Money Flow (CMF), a volume-related oscillator. The CMF is a measure of buying pressure compared to the total volume over the past 21 days. The CMF recently turned above zero, indicating the potential start of an upward trend. Further confirmation of sustained momentum is needed if a pull-back (with declining volume) around the 66.00 resistance level nears.

For a technical view of South Korea's KOSPI index, read Nicole Elliott's 4/23 column in the South China Morning Post. Nicole identifies a potential breakout from major long-term resistance going back to 2007.

South Korea (a "closet developed-market country"), is not unique in its latest breakout. China, Japan, and Europe are trending higher on policy support. As investors cover their shorts, expect increased flows outside of the US. This will likely precede a pick up in global growth.

This should be a positive for emerging markets - a group that has evolved to track ex-US/Canada country performance (EAFE index). However, despite the recent counter-trend breakout in the emerging market ETF (EEM) relative to the S&P 500, more confirmation is needed given increasing signs of a pull-back along the long-term downtrend.

Given further confirmation in the months ahead, positive signals from international equities could imply a breakdown in the US Dollar and an advance in commodities -- all of which provide support for inflation.