Dubai: Last week the Dubai Financial Market General Index (DFMGI) dropped to a seven-week low before bouncing to close at 4,864.03, down 317.11 or 6.12 per cent for the week. Not surprisingly, market breadth was bearish with 27 declining issues and six advancing, while volume declined slightly to reach a three-week low.

This was the worst weekly performance for the index since the first week of September 2013. More importantly some key short-term technical levels were surpassed to the downside. In addition to reaching a seven-week low, the DFMGI fell below its 12-week exponential moving average (ema) (55-day ema on daily chart) for the first time since early-September 2013. However, it did not close below it, which would be a stronger bearish indication. These moving averages are another way of identifying support for the 36-week uptrend. The 12-week ema and 55-day ema are now at 4,738.41 and 4,761.74, respectively.

By Wednesday the index was down as much as 12.3 per cent before support was found and buyers stepped in to take advantage of lower prices. The subsequent bounce into Thursday’s close recovered approximately 50 per cent of the week’s decline. In the short-term the DFMGI is likely to see further upside into the 5,000 resistance area as it reached oversold conditions last week on a daily basis.

On hitting last week’s low of 4,544.07, the DFMGI had corrected 15.95 per cent off the most recent peak of 5,406.52. That was just shy of the deepest correction since July 2012 of 16.72 per cent, which occurred early-September 2013.

Pattern

When we also consider time, last week was only the second sequential down week coming off the peak. Each of the four prior corrections over the past year, on a weekly basis, have ended within approximately two to three weeks. This tells us a couple things.

First, if this pattern repeats, last week’s low may be the bottom of the correction which could lead to an eventual continuation of the uptrend into new highs. This is what has happened since April 2013. A decisive daily close above last week’s high of 5,182.36 would be the first action to support this scenario. And second, if there is daily close below last week’s low, a more serious bearish signal is given, which could lead to a prolonged correction beyond several weeks.

There is another important factor that seems to lean towards a bearish scenario. A negative divergence between the overall rate of price appreciation and upward momentum on a weekly basis has formed. This comes from the Relative Strength Index (RSI), a technical indicator measuring momentum. In other words, the DFMGI has advanced too far too fast and the odds now favour a further correction.

The next support area to watch below last week’s low is around 4,388 (21-week ema), followed by approximately 3,680, prior resistance of a five-week base from February/March of this year. The lower price level seems very likely to be reached as 3,682.29 completes a minimum anticipated Fibonacci retracement of the uptrend starting from September 2013 of 38.2 per cent. That’s only if the DFMGI has a daily close below last week’s low.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) declined 95.76 or1.91 per cent last week to close at 4,925.71. There were 31 declining issues versus eight advancing, and volume fell to a 10-week low.

The ADI has been weakening for the past four weeks and found support on Wednesday at 4,722.96. That low completed a 9.86 decline from the most recent peak of 5,239.38, and a 5.94 per cent drop for the week. Support was found in the area of the 100-day ema (now at 4,792.84). This was the first time since early-September 2013 that the ADI has fallen to the 100ema, when it dropped below it only briefly before recovering. So, it very well could signal a low for the current correction in the ADI.

Whether a continuation of the uptrend will continue in the foreseeable future remains to be seen. A period of consolidation could be more likely. The first sign of strength is on a daily close above last week’s high of 5,030.45. But there are multiple other areas of potential resistance all the way up to 5,239.38.

Alternatively, a daily close below 4,722.96 signals a more serious correction with the next key level of support around 4,639, the swing low of the prior 7.3 per cent correction that bottomed on March 13. That would also be around potential support represented by the 17-month uptrend line. Below there is the 200-day ema now around 4,439.

Stocks to watch

As we head into the summer months market risk remains high. It’s possible the correction is over but the charts of most stocks are not clear. Short-term traders will find opportunities but for longer-term investors it may be a time to focus on managing current positions, protecting profits and lowering overall risk exposure. The odds for a rapid recovery and continuation of the uptrend have diminished. Sometimes the most prudent course of action is to wait. This of course depends on an individual’s capital, risk tolerance and overall portfolio exposure.

 

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