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Buying or Shorting Evergrande? Technical support & resistance

October 28, 2021 18:03
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In this post from Short Selling, we will talk about the latest important news connected with Evergrande and where the price of this stock could move in the upcoming period. Evergrande is one of China's largest real estate developers, the company was founded by Chinese billionaire Xu Jiayin, and it had more than 200,000 employees before its debt crisis. Evergrande made its name in residential property, but its interests extend far beyond that, and the group has also invested in electric vehicles, food, and beverage business, sports, and theme parks.

Evergrande entered into trouble because its debt ballooned as it borrowed to finance its various pursuits, and the group has become China's most indebted developer, with more than $300 billion worth of liabilities. Evergrande recently warned investors of cash flow issues, but it also reported that it was having trouble finding buyers for some of its assets in a stock exchange filing. Mattie Bekink, China director of the Economist Intelligence Unit, said that the main reason for this was that Evergrande moved from its core business and got into this mess.

Evergrande recently reported that issues regarding payment on a domestic yuan bond had been “settled through negotiations” but did not elaborate on the terms of the other obligations, which are much higher. Evergrande brought on financial advisers to help assess the situation and announced that it would sell part of its stake in a local bank for roughly $1.5 billion. Evergrande is trying to sell off its office tower in Hong Kong, which it bought for about $1.6 billion in 2015; still, even with cash infusions, lots of analysts suggest it may already be too late to save the company. What do you think? It's possible to trade Evergrade CFDs at Capital with low spread. Try here now!

“Evergrande's collapse would be the biggest test that China's financial system has faced in years. The root of Evergrande's troubles and those of other highly-leveraged developers is that residential property demand in China is entering an era of sustained decline. Evergrande's ongoing collapse has focused attention on the impact a wave of property developer defaults would have on China's growth,” said Mark Williams, Capital Economics' chief Asia economist.

According to JP Morgan, Evergrande has billions of dollars worth of off-balance-sheet debt, so the total debt could be even higher, as data on some off-balance-sheet debt is not publicly available. Because of this, investors are afraid that it could even turn into China's Lehman Brothers moment, sending shockwaves across the world's second-biggest economy.

Technical analysis
Evergrande shares have crashed by almost 85% so far this year, and the risk of further decline is not over yet. We can expect that the price could test the strong support level at 2 HKD, and one of the easiest ways to buy or short Evergrande shares is through a margin trading platform. It's not a good idea to hold a short position for long periods or to leave an open position with no stop-loss order. Keen to trade Evergrade with leverage? You can trade Evergrade both with or without leverage from Capital!

I marked current support and resistance levels on the chart above to help traders understand where the price could move. The more often price tests a level of resistance or support without breaking it, the stronger the resistance or support area is. With the trend still clearly pointing to the downside, there is also a possibility for price growth, and if the price advances above 4 HKD, the next resistance could be located around 5 HKD. The current support level is 2.5 HKD, and if the price breaks this level, it would be a “SELL” signal, and we have the open way to 2 HKD. If the price drops below 2 HKD, which represents very strong support, the next target could be located around 1 HKD or even below.

Conclusion
Evergrande shares remain in the focus since it entered into trouble because its debt ballooned as it borrowed to finance its various pursuits. Evergrande is one of China's largest real estate developers, which has become China's most indebted developer, with more than $300 billion worth of liabilities. According to JP Morgan, Evergrande has billions of dollars worth of off-balance-sheet debt, and because of this, investors are afraid that it could even turn into China's Lehman Brothers moment. Lots of analysts suggest it may already be too late to save the company, and Evergrande's collapse would be the biggest test that China's financial system has faced in years. The current support level is 2.5 HKD, and if the price breaks this level, it would be a “SELL” signal, and we have the open way to 2 HKD. If the price drops below 2 HKD, which represents very strong support, the next target could be located around 1 HKD or even below.

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