Last week the Dubai Financial Market General Index (DFMGI) dropped 28.03 or 1.48 per cent to close at 1,859.56. This is the first weekly decline in eight weeks. Market breadth was bearish with 25 declining issues and only five advancing, while volume fell below the level of the prior week.

So far the DFMGI has stalled in the area of resistance seen back in late-March 2010, with each of the highs of the past two weeks stopping in that area. The recent high, and therefore near-term resistance, is at 1,890.87.

As mentioned last week the DFMGI is the most overbought in at least five years according to the Relative Strength Index (RSI) momentum indicator on the weekly chart. When combined with the stall at a key potential resistance zone, as mentioned above, the chance for a more significant pullback lower at this point is rising.

A drop to below last week’s low of 1,842.59 will be the first sign that additional weakening is likely. There is then a support zone from approximately 1,791.46 to 1,770.40. If a more serious correction gets underway then a decline down to the 1,656 area, and possibly back down to the 200 daily exponential moving average (ema), now at 1,620.23, is possible without violating the long-term bullish trend structure that has been developing for the past 13 months.

Following the sharp first quarter rally last year the DFMGI went into a four-month correction. Certainly, we could see a similar fate this year if more aggressive profit taking starts to take hold. The DFMGI has rallied as much as 20 per cent since the December 2012 retracement low of 1,575.32, and got to 32.7 per cent above the June 2012 bottom of the four-month 2012 correction.

Recent strength in the DFMGI has given multiple bullish signals improving the long-term outlook for the Dubai market. However, for the medium-term a correction at this point would be healthy as investor enthusiasm needs to die down a bit in order to have something left for a future rally and a continuation of the bull trend.

Once last week’s high is cleared with a daily close above that level then next watch for more aggressive selling to come in first around 2,200, then 2,409.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) moved higher by 26.99 or 0.94 per cent last week to close at 2,908.77. This is the eighth week in a row that the index has closed higher. Market breadth remained bullish with 28 advancing issues and 16 declining, while volume rose noticeably. Volume reached its highest level since October 2009. The ADI has now rallied 26.8 per cent above the January 2012 low and 12.6 per cent above the December 2012 low.

The three-year high of 2,944.45 is the next resistance zone for the ADI. That is where a peak was hit in March 2010. High volume in an uptrend is generally considered to be a bullish sign. However, when volume reaches an extreme level further into a trend it can also foretell exhaustion of momentum and signals that a top could be near. When combined with an extreme overbought reading on the weekly RSI, as seen in the ADI, the chance of a top within the next one to several weeks becomes that much more likely. The weekly RSI for the ADI is now at its highest level in at least five years.

A drop below last week’s low of 2,873.24 gives the first sign of weakening which could precede a deeper decline. The ADI would then target 2,836, followed by 2,777.21, which was resistance from June 2011. After that watch the 2708 area for possible support.

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