Dubai: Developments in Bahrain are starting to affect market sentiment in the Gulf and the UAE will not be immune.

Price charts for the UAE stock markets have been poised recently for a retracement to the downside and civil unrest in the region may only serve to amplify a normal correction. Abu Dhabi began its slide on Wednesday with Dubai likely to follow.

Further profit taking at this stage is natural after the strong rallies off the bottoms hit several weeks ago. The fact that the Abu Dhabi Securities Exchange General Index (ADI) and Dubai Financial Market General Index (DFMGI) were able to hold strong for a majority of last week is a testament to their underlying short term strength.

In other words, a further pullback is normal and can be expected, but at some point buyers should come back in without too deep a correction — remaining above the lows of several weeks ago.

Of course, if civil unrest continues to spread in the region, then the outlook becomes more uncertain. It's important to keep in mind that although there will be fluctuations in the short term the long term trend remains bearish.

Dubai

Last week, the DFMGI closed down 3.53 or 0.22 per cent to close at 1,594.87. Advancing issues lead declining at 18 to nine, respectively. Although volume was the lowest of the past several weeks, its importance is limited given the shortened trading week.

Over the past week and a half the DFMGI has formed a tight consolidation pattern (narrow high-low range) after a strong rally off the bottom hit several weeks ago.

Some profit-taking started to show up on Wednesday and the index managed to break below this range before closing right around the 1,595.49 support level mentioned last week as being an important price area to watch.

Notice that the close of 1,594.87 is below this level but close enough to be within the support zone. Again, where the index closes relative to support and resistance levels is important.

However, given that the DFMGI broke below the 1,594.49 price level earlier in the day, it seems to be signalling that it wants to go lower. Given what's happening in the ADI, this possibility seems high right now.

If the DFMGI does fall further then where might it find support? Based on Fibonacci analysis the minimum decline could easily reach 1,577.35, which is the 38.2 per cent retracement of the recent uptrend rally from the January 30 low.

A potentially stronger support zone is from 1,562.89, the 50 per cent retracement of the trend just mentioned, and 1,535.05, previous resistance from July 22, 2010. Why stronger? Because there are two pieces of separate analysis that identify a potenial support zone very close together.

The resistance level to watch remains 1,624.18, the high of the rally, followed by the 200 period exponential moving average (ema), currently at 1,649.

Abu Dhabi

The ADI closed down 26.64 or 0.98 per cent ending the week at 2,683.97. Volume was very low given the short trading week. Declining issues lead advancing at 22 to 14, respectively.

Additional profit taking is likely in the short term given that Wednesday's close was below each of the previous five trading days, below the 200ema, and underneath previous support of 2,690.37 from December 22, 2010.

Also, the range of high to low on Wednesday was relatively wider than recent trading history and the close was very near the low of the day. For all these reasons the ADI will likely see further downside. But again, so far this is normal and to be expected after such a strong rally as we've seen recently.

There are several areas of potential price support. The first is around 2,663.47, the 38.2 per cent Fibonacci retracement level, followed by a support zone from 2,659.55 (support of October 5, 2010) to 2,642.96 (50 per cent retracement of the trend), and finally 2,622.44, the 61.8 per cent retracement level.

The high of last week (2,729.90) in the ADI now becomes an important resistance level to watch. A close above it signals strengthening and improves the chances the ADI could go higher at that point.

Stocks to watch

Given the risk of further declines in the short term investors are cautioned to tighten their risk management strategies relative to their overall objectives.

Abu Dhabi National Energy Company has formed a large descending triangle consolidation pattern on its chart. Recent price action has found support at the 200ema.

This formation is generally considered to be bearish. So, if the bottom support of this pattern, now at Dh1.35, is broken then an accelerated move to the downside could be in the offing.

You can see what's happened with Hits Telecom where a similar pattern occurred up until January 27. The stock then gapped down through support of the pattern and has continued to decline since.

Dubai Islamic Bank has continued to trend higher in the short term reflecting relative strength compared to other listings.

If selling in the larger market accelerates Hits could also see a pullback towards support to Dh2.26 or Dh2.25, but it may be less than seen in other issues given its relative strength.

 

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