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TECHNICAL ANALYSIS


Asian Tigers Unite!

01/31/02 08:56:33 AM
by David Penn

While Japan's stock market continues to slide, neighbors South Korea and Taiwan rally their way into 2002.

Security:   EWY, EWT, EWM
Position:   N/A

The average investor and trader looking for opportunities in the Asian markets typically will begin his or her lament with the Japanese stock market, the Nikkei. However, continued economic weakness in Japan and the lack of meaningful financial reform has kept Japanese equities in a secular bear market for over a decade. Even with powerful, countertrend rallies--such as the major, 62% countertrend rally in 1999--the bear market in Japanese stocks has been ferocious (the Nikkei 225 retraced the entire 1999 move in 2000 and, by the end of 2001, had set a new low).

Japan's stocks are continuing to drop, but other Asian equity markets, buoyed by the bullishness following the September 11th terrorist attacks in the United States, have continued to rally into 2002. Whether this suggests that the Asian economic recovery will come less from Japan and more from countries like South Korea, remains to be seen. But the powerful rally in some of these Asian equities markets--South Korea, Taiwan and Malaysia in particular--as well as bottoming processes that, at least in the case of South Korea, have lasted as much as a year, hint at opportunities in the area that may have been obscured by all the attention given Japan's increasingly precarious state.

South Korean, Taiwanese and Malyasian equities markets are all headed toward important intermediate top tests.
Graphic provided by: MetaStock.
 
The moves in the South Korea equity market have been the most impressive. As represented by the iShares MSCI Index Funds, the South Korea index (EWY) has doubled since the September 2001 lows. South Korea advanced beyond intermediate resistance in November, during a period of exceptional bullishness and above average volumes (the EWY was up 27% in November alone). At present, South Korea has successfully tested a range bottom at 18, and has moved up to successfully test the range top at 19.75. On January 28th, the day that options trading began on seven listed companies on the Korea Stock Exchange--all of which are part of the iShares MSCI South Korea Index Fund--the EWY was trading at about 20. If the price action leading up to the end of January was any indication, there may indeed be more gains to come from what has already been a mighty rally for South Korean equities.

The rally in Taiwanese equities has been impressive, as well. Compared to South Korea, Taiwanese stocks have not rallied quite as strongly from their September 2001 low--though their 85% return is nothing to complain about. If anything, the bottom established by the iShares MSCI Taiwan Index Fund (EWT), is less conclusive than the South Korea bottom--a bottom that included a failed head and shoulders bottom from October 2000 to September 2001--and its rally was somewhat less explosive. The EWT is also headed toward a test of the range top--the range starting in December with resistance at 11.8 (the January 2002 peak). A successful test of resistance at 11.8, particularly if 11.8 becomes support, could set up Taiwanese equities for a strong continuation of its four-month rally.

What is most important about the charts for the South Korea and Taiwan MSCI equities indexes is that in these two cases, major bearish, long-term trendlines were broken on the upside relatively early in the advances. South Korea broke its downtrend line late in October (almost November), for example, and Taiwan broke its downtrend line just as November began. Malaysia (iShares MSCI Index code EWM) is an interesting case. Malaysian equities look to have put in a significant bottom in April 2001. The rally from that breakout also broke a downtrend line that had been in place since February 2000. After gaining approximately 25%, EWM corrected sharply, losing 20%. Importantly, the correction, which was part of the September 11th break, stopped when it ran into the support from the February 2000 downtrend line. This is the support from which the EWM has rallied in the fall of 2001, gaining 25% from the September bottom to date.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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