Dubai: The Dubai Financial Market General Index (DFMGI) saw heavy profit taking last week falling 176.95 or 6.55 per cent to close at 2,523.13, its biggest one-week drop since early-2011. That was a 50 per cent recovery following a decline of 13.55 per cent from the peak of 2,761.55 earlier in the week, the largest correction since mid-2012 and the deepest this year. Buyers stepped in to provide support at 2,357.40.

Volume surged to the fourth highest level of the past five years peaking on Sunday and declining sequentially throughout the rest of the week as selling pressure diminished somewhat. Some damage was done to the short-term trend but the medium and long-term uptrends remain intact. Regardless, the heavy selling and volatility indicates a change in investor sentiment that could take some time to play out before the uptrend is to continue in any meaningful way. Last week’s poor performance increases the chance for an eventual deeper correction or prolonged consolidation period. Weakness dominated with 27 declining issues and only five advancing.

Aggressive buying was seen intraday on Wednesday at the 2,357.40 price level as the index sold off hard earlier in the day, falling through both the short-term internal trend line and the 21-day exponential moving average (ema). It then quickly recovered to close in the top quarter of the daily high to low range. The significance of the 2,357.40 support area is strengthened by the fact that it is also in the area of two moving averages, which are used to identify dynamic support, the 100-day ema and the 21 weekly ema. This was the first time each has been touched this year. The DFMGI was last sitting at support of both ema’s at the end of 2012, and then started to move away at the start of 2013 as a new more aggressive ascent began.

Both the short-term trend line and 21-day ema have been identifying the same support area for the uptrend since early-July. As of last week’s close the DFMGI is back above each as the 21-day ema is now at 2,498.16, slightly below last week’s close.

The speed and severity of last week’s performance is likely to make a recovery to a new trend high that much more difficult in the foreseeable future. Any bounce from this point can be anticipated to face strong overhead resistance from sellers who haven’t yet exited providing another opportunity to take profits following strong gains for the year. The DFMGI is still up significantly for 2013 with a 56.6 per cent gain. The most recent rally off the June 24 low was 26.6 per cent.

The 19- month uptrend remains intact as long as the index doesn’t close below the prior swing low of 2,182.03 from June. A decline below last week’s low of 2,357.40 will likely lead to a test of the June support and possibly the 200-day ema, now at 2,149.61, an important long-term trend indicator.

Near-term resistance is first around 2,564.32, followed by 2,606/09.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) dropped as much as 7.25 per cent before ending down 206.70 or 5.24 per cent to close at 3,734.55. This was the largest weekly decline since November 2009 with the index falling through both the 21-day and 55-day ema’s before finding support around the area of the uptrend line at 3,687.31. Volume reached the fifth highest level of the past three years, and there were 33 declining issues and only six advancing. After the fall the ADI is up 51.4 per cent for the year.

The week started with a move to a new high of 3,974.35. That’s less than one per cent away from the 61.8 per cent Fibonacci retracement of the long-term downtrend begun from the June 2008 peak, essentially completing that retracement.

Heading into this week, a daily close below last week’s low of 3,687.31 puts the 3,602.40 to 3,595.30 support zone in sight. It consists of the 21-week ema and 100-week ema, respectively. That zone is also within the middle of the consolidation range formed in the second quarter of this year. Further down is a support area around 3,494.83, the swing low from late-June and a key part of the uptrend structure for the year. A drop below that level indicates a more significant correction is in the works with the ADI then targeting the 200-day ema around 3,321.70, followed by the 55-week ema at 3,214.87.

A bounce from current levels will likely see resistance increase starting around 3,835.14.

Stocks to Watch

After falling as much as 11.5 per cent to 2.30, Aramex made almost a full recovery to end the week at 2.59, down only 0.38 per cent. The stock has maintained its ascending channel price structure and will continue to do so as long as it doesn’t fall below last week’s low. The 2.30 support area is where both the uptrend line and 200-day ema converge and where buyers stepping in aggressively. A daily close above 2.62 is needed for a sign of new strength, followed by a move above 2.65.

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