Stock markets globally are beginning to tip over. Some have been predicting a pullback in the markets for some time – it is the season after all – see here. But the specific trigger catalyst has been the debacle at Evergrande. The warnings are flashing red around the globe.
Evergrande contagion has finally arrived, and with China, traders are getting out while they can and where they can. Evergrande – which is about to default – and has crashed. Evergrande property development peers such as New World Development and Sun Kung Kai Properties both are also down. Sunac China and CK Asset plunging as well, the Hang Seng property index has crashed.
The mighty China Evergrande Group (2nd largest in China) once had $47.5bn in market capitalization – it is heading to zero, and could extend to other similar groups in China. See more on this story here. Penalties in China can be severe – six Evergrande execs face “severe punishment” over early redemptions for themselves – see here.
In the US the contagion is being felt in the markets. It is a good time to look at some technical analysis and suss out some various scenarios that could happen. Note click on the charts below for better viewing.
Technical Analysis – the short-term view (scenarios #1 and #2).
Note that the markets have been in a tight trading channel for months. Putting on a ZigZag indicator we can see that no short-term lows have broken until now. The markets also have broken the uptrend and will require some time to repair. See below two possible scenarios that may unfold over the next several months.
Technical Analysis – the long-term view (scenario #3).
See the following for several possible scenarios along with the percentage of likelihood that they could occur.
- A brief pullback and a continuation to new highs – 40% likelihood. In this scenario, markets are in for a very brief pullback to 4240 on the S&P before resuming the uptrend. Due to seasonality and generally when significant trends/support have broken, markets will react stronger to the trend violation and hence, scenario #2 may be more likely.
- A large consolidation period that may last months before a continuation to new highs – 50% likelihood. In this scenario, markets are in for a more significant longer pullback to either 3990 or as far down as 3597 on the S&P before resuming the uptrend after a few months of consolidation.
- A severe market failure that is similar to the 2008 “Great Recession” or worse – 10% likelihood. Please read the various article under Economy to understand why this scenario’s likelihood is so high – even at 10%. In these, shall we say doomsday scenarios, they could take two forms. In scenario #3A, markets crash and rebuild for at least 18mo or longer. The S&P could go as low as 3370. In scenario #3B, the markets crash as low as 2240, a full 50% retrace from recent highs. The Great Reset occurs – “God help us.” What happens to the stock markets for the average person won’t matter.
Please feel free to provide your analysis in the comment section below.
Do note that in the markets, new events can come and change this assessment at any time. We do not give investment advice and the information presented here is for your reference only and is not a recommendation for any of our readers to buy or sell any assets. We will update this technical analysis in future posts as necessary – follow the Right Wire Report hashtag #TradingAnalysis accordingly by saving the corresponding link.