GOLDMAN SACHS: The ASX200 could fall 20%

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The ASX200 has made a recent break higher, but technical analysts at Goldman Sachs say to be wary of a sharp fall.

“Structurally bearish” is how the bank called the local index’s technical chart pattern. And if the patterns holds, the research suggests a sharp correction is in store, with the ASX potentially falling below 4,700.

That’s more than 20% from the index’s current level. Here’s the chart:

Source: Goldman Sachs

The bank’s technical strategists argue the local index is trading in an “A-B-C” pattern.

In such a pattern, an asset class will track towards point A (either up or down), before reversing course to point B. To complete the pattern, it changes tack again to point C, which is typically around the same length and duration as point A.

The chart shows the ASX reversed course in February 2015, after reaching a high of just under 6,000 points. That represented a peak in the index’s steady climb from below 3,400 in 2009, in the wake of the global financial crisis.

It subsequently fell to point A, below 4,700 in early 2016, before staging a recovery to point B in May this year. Based on those indicators, if the chart were to follow the A-B-C pattern to point C, that suggests another fall similar in length to point A. Make sense? Here’s Goldman:

“Said another way, the index may well be forming a material top here. The C leg of a correction that started at the February 2015 high could eventually retrace as far down as 4,667; back towards the lows from February 2016,” Goldman said.

It would mark a steep fall from current levels, and the GS analysts said to be aware of a number of key indicators from a technical standpoint.

They said at current levels, the first level of resistance to watch is 5,846. If the ASX struggles to break through that range, then a fall back to point C is more likely.

“Downside risks heighten significantly below 5,510,” they added. “Breaking this level would be the first indication of an impulsive decline seen in some time. This would then open up a minimum target down at 5,308.”

However, the analysts said the ASX200 will need to break higher — to above the 5,957 to 5,997 range — before it’s properly in the clear from the downside technical indicators.

Most would agree it’s been a somewhat disappointing year for the local index, which has under-performed its global peers in developed markets.

However, after being stuck in a narrow range between 5,650 and 5,800 since May, the ASX200 has finally seen some demand and closed 1.8% higher last week — the best weekly gain in more than six months.

At its current level a short time ago, the index was trading just above Goldman’s first level of upside resistance at 5,848.50.

Time will tell if the positive global growth backdrop –global industrial production just had its strongest quarter in six years — will drive the local index higher, and out of Goldman’s downside trading range.

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