When you’re dealing with a pullback, you have two major things to consider…

The first is the size of the drawdown. You always want to cut your losses short. If an asset is starting to take a dive, you want to get out before a larger fall can occur.

The other thing to note is how quickly the pullback happens. If a stock falls sharply in a short period, that can mean it simply got ahead of itself.

Importantly, those kinds of crashes can lead to oversold setups… like the one we’re seeing in a major market right now.

Today, it means a 16% rally is possible once prices begin to reverse. And that reversal has already begun.

Let me explain…

Today, we’re looking at a market few investors think much about. But it’s one I highlighted a couple of months back as a solid opportunity…

We’re looking at Korean stocks. In August, investors were bailing on this market at a near-record pace. Prices have fallen further since then. But now, history tells us they’ve fallen too much, too fast.

We can see this based on the relative strength index (“RSI”). It’s the easiest way to see if an asset has gotten ahead of itself in either direction.

When a stock hits overbought territory – rising above an RSI of 70 – that means it has run too fast to the upside… and a pullback is likely in the short term.

We can also use this measure to capture a reversal after a downside move. An oversold extreme happens when a stock drops below an RSI of 30. When it falls below and rises back above that level, a rally is likely right around the corner.

That’s exactly what’s possible in Korean stocks right now. The iShares MSCI South Korea Fund (EWY) fell 11% in little more than a month… And that quick drawdown caused the fund to hit oversold territory on October 6. Check it out…

Korean stocks have fallen quickly in recent months. Now, this oversold indicator is flashing an opportunity to buy.

Since 2000, buying EWY after similar setups has led to profits. And this strategy can mean big outperformance over the course of a year. Take a look…

EWY has returned nearly 7% per year since mid-2000. That’s a decent return. But a simple buy-and-hold strategy isn’t the best method…

History shows that buying after oversold setups can turn average returns into great ones. Similar cases have led to 2% gains in three months, 6% gains in six months, and a 16% gain over the next year.

Now, it’s hard to know for sure if EWY has started a new uptrend. But it is up around 7% from its recent low.

Given the recent flood of investors abandoning Korean stocks, plus the RSI signal that happened earlier this month, this could be the start of something big. Double-digit upside is possible. And EWY is the easiest way to take advantage of it.

Good investing,

— Chris Igou

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Source: Daily Wealth