As the U.S. continues to be the main equity game in town and the country enjoys the benefits of more aggressive monetary easing than the Eurozone since 2009, emerging markets are struggling. Among them, South Korean stocks appear to be on a precipice. EWY (iShares MSCI South Korea) offers a way to go short this market, a trade that could balance the risk of heavy, long exposure to U.S. equities.
As you can see on the weekly chart below, EWY breached its support at 57.27 in October. Since then rally attempts have failed. Additionally, momentum is bearish. RSI averages show a particular pattern of behavior I like to see in short scenarios, and the coincidence of technical support violation enhances the negative implications.
Focus on the fast RSI average (blue line). It recovered a fair amount since October (the improvement is even more pronounced on a daily chart); yet price is in exactly the same place. In the context of a downtrend, a significant rise in momentum alongside static price action is generally bearish, an indication that a lot of buying was overwhelmed by selling.
Meanwhile, the slow RSI average is still dropping like a stone, and momentum has ample room to fall before registering oversold readings.
The Trade
A stop loss of 1% above last week’s high of 57.45 would be 58.12. That translates to risk of about 3% based on yesterday’s closing price. This compares favorably with downside potential based on the next layer of chart support at 50.93.
Good trading, everyone.
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