KOSPI Index forms a risky pattern, pointing to a drop as rally stalls

The KOSPI Index has pulled back in the past few days as the recent bull run stalled at its all-time high. It was trading at KRW 4,027, a few points below the year-to-date high of KRW 4,212.

Why the KOSPI Composite Index is falling 

KOSPI, the index tracking the biggest companies in South Korea, has come under pressure in the past few days.

One reason for this is that many foreign and local funds have started to sell South Korean stocks as they book profits following the recent surge. This surge drove the KOSPI from a low of KRW 2,290 in April to a high of KRW 4,212 in November this year.

The ongoing outflows also explain why the South Korean won has tumbled to the lowest level in eight months, with demand for US dollars continuing rising. It has dropped by 8% in the second half of the year, making it the worst-performing currency in Asia.

READ MORE: Here’s why South Korea’s KOSPI Index has soared this year

The KOSPI is also wavering because of the ongoing jitters surrounding the artificial intelligence industry. These jitters have pushed most companies in the industry, including blue-chip names like Broadcom, Nvidia, and Oracle, much lower than their year-to-date highs.

South Korea is home to some of the top beneficiaries of the industry, with Samsung being the biggest player in the industry. Samsung makes some fun the top chips used in the AI industry, where it makes numerous products like NAND and DRAM. Other AI companies in the KOSPI Index like SK Hynix, Naver, and Kakao, among others.

Some of these companies have pulled back in the past few weeks, mirroring the performance of their American peers like Oracle and Broadcom.

The KOSPI Index has also pulled back because of the ongoing performance of the country’s bond market. Data shows that the ten-year bond yield stands at 3.30%, much higher than the year-to-date low of 2.557%.

The South Korean Central Bank has maintained interest rates steady in the past few months, with officials prioritizing financial stability even as inflation has remained at an elevated level.

The KOSPI Index has also retreated as investors remained concerned about valuation following its surge from a low of KRW 2,290 in April to a high of KRW 4,212 in November.

KOSPI Index technical analysis

Technicals suggest that the KOSPI Index has more downside to go in the near term. It formed a double-top pattern at 4,212 KRW and a neckline at KRW 3,867, its lowest level on November 21. A double-top is one of the most popular bearish patterns in technical analysis  

The Relative Strength Index (RSI) and other oscillators have formed a bearish divergence pattern, which happens when these oscillators are moving downwards even as the price rises. 

Therefore, the most likely scenario is where the index pulls back in the coming weeks and moves to the key support level at KRW 3,867, the neckline of the double-top pattern. A drop below that level and the dynamic support of the 50-day moving average will invalidate the bullish outlook.

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