The sell-off in UAE markets was followed by renewed weakness in global equity markets, strength in gold, and weakness in oil, on the back of concerns over a slowdown in China and the developing Ukraine situation.

Given bearish signals in UAE markets, plus global weakening in stocks, near-term rallies are likely to be hit by renewed selling pressure as investors more aggressively look to take profits and minimize losses, for those who got into the market late. Indications are that last week is the beginning of a correction in the UAE markets that could last weeks or months.

Dubai

Last week the Dubai Financial Market General Index (DFMGI) fell 172.7 or 4.16 per cent to close at 3,980.94. It was down as much as 6.84 per cent for the week on Friday before recovering some lost ground later in the day. Volume exceeded the prior week, but remained relatively low, the second lowest level of the past 14 weeks. Weakness was widespread with 30 declining issues and only seven advancing.

What is most significant now for the near-term is that the DFMGI closed below weekly support of 4,026.30 from three week’s ago, putting it at a four-week closing low. In addition, the low for the week, 3,869.34, put the index at a five-week low. Support for the week was found at the 10-week exponential moving average (ema), an indicator to help identify the trend. Together, these are signs of at least a short-term market top, and possibly a medium-term top. Therefore, the index could easily fall further in the coming weeks.

It is interesting to note when taking a step back that there is time symmetry on a weekly basis when looking at the structure of the uptrend (swing low to peak). There are twenty-two weeks from the September 12, 2013 weekly low of 2,299.80 to the peak of 4,255.19 reached four weeks ago. This almost matches the 21-week prior rally from the April 4, 2013 weekly low of 1,819.46 to the 2,761.65 peak hit during the week of August 29, 2013.

The second move of 85 per cent was 2.5 times the first, which was 34 per cent. This reflects an the obvious increase in upward momentum or rate of change as the DFMGI strengthened out of the September 2013 swing low, which ended a 16.72 per cent correction. It gives support to the probability of a medium-term top in the DFMGI.

A drop below last week’s low of 3,869.34 will also put the index below the 10-week ema for the first time in 17-weeks, giving another bearish signal. The DFMGI would then be targeting the next support zone starting around 3,586, which is where the 20-week ema is now, down to approximately 3,508. The lower level will complete a 38.2 per cent Fibonacci retracement of the uptrend measured from the September 2013 low. Fibonacci ratio analysis is used to mathematically calculate potential support levels by looking at the prior uptrend, in this case.

The previous three weeks has created a resistance zone from 4,026.30 up to 4,255.19, with 4,098 being an area to watch carefully.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) declined 143.08 or 2.92 per cent last week to close at 4,753.79, the lowest weekly close in five weeks. Earlier on Thursday the index was down as much as 4.9 per cent for the week, before bouncing off support around the 55-day ema, and closing higher for the day. Market breadth was bearish with 33 declining issues and only eight advancing.

Volume fell to a five-week low, hitting the lowest level since late-August 2013. Low volume on a decline might indicate that sellers or not pushing the market down as much as a loss of enthusiasm from buyers. Regardless the price pattern has priority and it is pointing lower.

A drop below last week’s low of 4,639.78 puts the ADI clearly below the 55-day ema and gives another bearish signal. The next target would then be around 4,413.

On the upside, watch for resistance from around 4,820.08 up to 4,851.43.

Stocks to watch

Arabetc topped at 5.27 five weeks ago for a 83.6 per cent gain in 2014. For the past several weeks the stock has consolidated sideways and has held support at 4.57. The stock closed at 4.82 last week, up 68 per cent for the year.

A definitive drop below 4.57 is likely to lead to a deeper correction, with a daily close below it confirming weakness. Arabetec would then be targeting 4.20, followed by 3.875. And it could go lower if profit taking picks up significantly. Regardless, the long-term bullish outlook would only start to weaken below 2.48.

A similar price pattern can be seen in the chart of Dartakaful towards late 2014. Dartakaful is now down 34 per cent from its December 2013 high of 1.53.

 

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