Dubai: Last week, Italy moved to the forefront of the Eurozone debt crisis as the yield on its 10-year bonds rose above seven per cent, thereby making new debt to replace maturing debt that much more expensive, and therefore unsustainable. This is an important development in the debt crisis as Italy is the world's eighth largest economy and has more debt outstanding than Greece, Ireland and Portugal combined. Italy is too big to bail out and too big to fail. In other words, the debt crisis in Europe is now moving to a much more serious stage which adds to global economic uncertainty and therefore financial market risk for the coming months.

The UAE is certainly not immune to the impact of another global economic downturn. Its stock markets are already vulnerable given bearish long-term trends and recent performance. The situation in Italy could play out over a number of months or could accelerate due to any number of potential surprises that rapidly adds risk to the global financial system.

However, in the short-term both Dubai and Abu Dhabi exchanges remain due for a further bounce. But, once significant resistance is reached, and if the global situation is still deteriorating, these markets are at risk of making new lows.

Dubai

The Dubai Financial Market General Index (DFMGI) declined 1.56 or 0.11 per cent last week to close at 1,382.72. There were 13 declining issues versus nine advancing. In the short-term the DFMGI is still in the process of bouncing off the 1,347.41 bottom of several weeks ago. As long as it trades above near term support of 1,362.99, the odds of another bullish move remains.

A close above monthly resistance at 1,433.77 confirms strengthening that could take the DFMGI higher, as this would be the first clear sign that the six-month medium-term downtrend is shifting.

At the same time a move below 1,326.99 is a sign of weakness, and puts 1,347.41 at risk of being hit again, if not broken. Just below there is 1,338.56, support from early March, and the low of the year.

As of this month the DFMGI has been in a downtrend for six years. Starting from the November 2005 high at 8,544.66 the DFMGI has fallen 84 per cent, based on last week's close.

It still seems likely that if the low of the year is to eventually be broken, due to the long-term bearish trend, then the market could rally higher first, before turning back down.

If a rally does come and the market does not turn back down but instead moves higher, it would need to close above the monthly high of 1,691.64 before negating a bearish long-term outlook.

After the impact of the 2008 financial crisis the DFMGI found a bottom in February 2009 at 1,428.09. Since then the index has experienced four notable rallies with the first and largest starting from that bottom.

Each subsequent rally has been hit with selling resistance at a lower price level than the previous rally, thereby creating a series of lower swing highs.

These lower swing highs are representing long-term sustained selling pressure that to date has shown no signs of abating. The bearish pattern of sequential lower swing highs remains until the index closes above the monthly high of 1,691.64.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) fell 4.39 or 0.18 per cent to close at 2,477.84. Declining issues lead advancing at 14 to six, respectively.

Let's first look at the short-term price patterns. The ADI continued to pull-back lower last week after a previous spike up off the 2,440.96 bottom from three weeks ago. This pull-back is normal after such a move.

It wouldn't be surprising at this point for the ADI to find support soon and make another move higher surpassing resistance of 2,511.91, the high from two weeks ago. There seems to be a good chance of this happening given that the index had previously closed lower for seven consecutive weeks, which is a long time without a counter move. Important resistance is at the monthly high of 2,539.59.

Alternatively, a move below 2,440.96 is bearish reflecting a continuation of the downtrend — which leads us to the long-term view.

The ADI is now down 60 per cent from its high of 6,266.53 reached in May of 2005. What looks to be most significant now is that the ADI broke down out of a large two year bearish symmetrical triangle consolidation chart pattern six weeks ago.

A classic interpretation of a breakdown from this pattern indicates a potential minimum target for the ADI of 2,043.14. Since this is a long-term pattern the index could take some time to reach that level, if it is to do so.

This analysis indicates a probability, not a certainty. Prior to the target is important long-term support around 2,130, the low from January 2009.

Stocks to watch

National Central Cooling has broken its downtrend line of the past six months and is holding above it. A close above Dh0.678 is the next bullish indication.

Drake and Scull shows strengthening on a move above Dh0.834.

Emaar Properties has minor resistance at Dh2.72. A move above there is the first sign of strengthening, giving it a chance of breaking above the recent high of Dh2.78.

 

Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at bruce@etf-portfolios.com

 

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