Dubai: After barely reaching a new high for the uptrend in the beginning of the week the Dubai Financial Market General Index (DFMGI) subsequently ended down 42.17 or 1.58 per cent at 2,631.98. This was the first weekly decline in seven weeks. Volume was at a five-week low even with shortened trading the prior week and reflects only mild selling pressure so far. The index is overbought however with momentum starting to weaken. A further sign of weakness can be seen in market breadth where there were 24 declining issues and only six advancing.

A further decline could easily see the DFMGI reach support of the 21-day exponential moving average (ema) around 2,569.70. The 21ema has been a good indicator for short-term trend support since the beginning of the year. Prior dips below the 21ema during corrections over that time period have been minor and recovered quickly, within two-weeks. A daily close below the 21ema will see the DFMGI next targeting the near-term internal trend line, which is currently aligned with the daily 55ema, now around 2,454.60. The 55ema has provided good medium-term support for the trend since the beginning of the year, with the index dropping below it for not more than a week.

Each of the two prior corrections since the beginning of the year have seen the index fall below both the 21ema and 50ema. In other words, each time the DFMGI has clearly fallen below the 21ema, the 55ema has been reached and exceeded to a minor degree.

The reason traders and analysts watch the charts for signs of what might be coming and to manage risk is that there are relationships between current price patterns and what has happened in the past. The seven-week rally has gained as much as 18.6 per cent so far (June 24 swing low to last week’s high). This is less than half of the prior three advances on a percentage basis that have occurred since the DFMGI found a bottom in January 2012. Those advances were 37.4/.5 per cent each during the past 20 months. Given the size of those rallies relative to the current, the expectation would be for any further weakening from current levels to eventually find support at either of the two moving averages just discussed and then continue higher. Of course, a sideways consolidation period is also possible. Alternatively, a decisive drop below the 55ema followed by further downside would likely see a deeper retracement.

The next potential resistance zone above last week’s high of 2,681.93 starts around 2,712 and goes up to 2,752. That resistance zone is followed by 2,870 to 3,049, which includes 2,998.9, which is 37.4 per cent above the most recent swing low of 2,182.03.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) slid 47.23 or 1.2 per cent last week ending at 3,882.18. This is the first decline in seven weeks, which is when the current rally began. Weakness was widespread with 22 declining issues versus only four advancing. Volume did not pick up during the retreat and actually reached its lowest level of the past 19 weeks, pointing to a likely mild pullback.

There are a couple of notable changes seen on the weekly chart. Last week’s low fell below the prior weekly low and the high was below the prior week’s high. A lower weekly low and lower high are the first signs of a possible change in the short-term trend. This reflects a shift in sentiment as investors look to book some profits after an 11.3 per cent gain in a little less than two months.

As with the DFMGI, the daily 21ema and 55ema have done a good job of identifying dynamic support of the uptrend during 2013, and can be expected to do so again. The 21ema is now at 3,851.89, and the 55ema is at 3,707.80. Keep in mind that as the index progresses the price represented by a moving average will change slightly.

On the upside, the next potential resistance zone above the most recent high of 3,941.22 is from approximately 3,956 to 4,001.56.

Stocks to Watch

Deyaar Development began to move up and out of a 16-month basing/consolidation pattern last week. The stock was up 2.05 per cent ending at 0.45. Although the percentage gain was small Deyaar was the biggest gainer in the Dubai market during poor performance among most other listings. This is a sign of its relative strength and indication of its potential.

Deyaar has been consolidating ever since its 98.66 per cent gain coming off the January 2012 low of 0.201. Resistance was seen at 0.463 after that rally. The key now is for the stock to close above 0.463 thereby confirming a breakout and trend continuation. Given the extent of the early-2012 rally the potential for this stock to move is there.

Deyaar must stay above last week’s low of 0.418 for the bullish scenario to hold. A daily close above that price level will see Deyaar then targeting 0.52, followed by 0.61.

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