South Korea Update: Look out Below

There is scope for further downside in South Korean equities. The long-term trend-line from 2012 lows in EWY was broken with a small downside gap around 55, which would imply a lower price projection around the 48 support zone.

The weekly EWY chart shows that bulls lost control near the 64 resistance area. The preceding bullish candle set-up discounted weakness on the macro level, which placed pressure on the Bank of Korea to ease policy measures. 

This thesis was short-lived, as expressed in my April 25 note on South Korea. The Chaikin Money Flow (a volume-related oscillator) turned positive around late May, which would have been a signal to buy EWY around 55 support and sell near 64 resistance.

Currently, the break lower in EWY appears oversold, as shown by the relative strength index (RSI). While this could signal near-term support around 48, a sustained counter-trend move is unlikely so long as decreasing momentum on the MACD remains. 

The Korean Won's recent decline against the Japanese Yen is also an important factor, which could strengthen support. However, a long-term downtrend remains for JPY/KRW, which keeps a bearish bias intact for EWY.