Dubai: Last week the Dubai Financial Market General Index (DFMGI) dropped by 77.71 or 2.10 per cent to close at 3,623.75, its weakest performance in 17 weeks. There were 16 advancing issues against 25 declining, while volume dipped to a five-week low.

The DFMGI triggered a breakdown from a double top trend reversal pattern last week as it fell below and closed below 3,648.32. This enhances the possibility that the index heads into a longer retracement or consolidation than what had been seen in December during the last pullback. In December the corrective phase was approximately 14 days, while the current corrective phase has hit 15 days and is not yet complete. Nevertheless, at this point the correction looks like it will be a normal retracement within a larger uptrend, meaning that the uptrend can be anticipated to continue once the retracement is complete.

Moving averages and trend lines are two technical analysis tools that can be used to help identify a price trend and also keep track of whether a trend is strengthening or weakening. Each may identify an area of support or resistance. There are different degrees of trend depending on one’s time horizon.

In the case of the DFMGI, the 21-day exponential moving average (ema) has done a good job of identifying the near or short-term trend ever since the index moved above it back in mid-November. Since then it has acted as dynamic support for the uptrend. As long as price stays above that moving average the underlying upward momentum of the trend is maintained. At the same time a drop below it is a sign that the trend is weakening. This is what we saw last week as the DFMGI fell below the 21-day ema support (now at 3,656.40) as it broke down from the double top and closed below it on both a daily and weekly basis.

Now that the DFMGI has fallen below the 21-day ema there is an excellent chance that it will fall to at least support of the 55-day ema, which is now at 3,576.15. The 55-day ema helps measure the intermediate-term trend. Support could be seen there or the index may drop below it and continue lower. If that happens then there is a potential support zone around 3,528.76, the 38.2 per cent Fibonacci retracement, to 3,490.66, support of the December swing low.

The December swing low is an integral part of the price structure of the short-term uptrend and therefore price should not close below it. If it does the intermediate-term bullish outlook for the DFMGI will need to be reviewed.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) fell by 177.96 or 3.85 per cent last week to close at 4,446.21. That’s the index’s biggest drop in at least a year and it occurred on four-week low volume. Market breadth was bearish with 27 declining issues again only nine advancing.

Since hitting a seventeen-month high at 4,714 two weeks ago the ADI has fallen hard. At last week’s 4,441.37 low the index was down 5.8 per cent, essentially hitting support from the most recent swing low of 4,436.65 from December. Last week’s drop also completed a 50 per cent retracement of the uptrend coming off the November low at 4,446.57, and reached support of the 200-day ema (4,447.44) and the 55-week ema (4,448.58).

Even though selling dominated into last week’s close as the index ended near the low, having several indicators all pointing to a similar price area of potential support means there is still a good chance the support zone around last week’s low may hold and lead to a bounce. We should know pretty quickly if this is that case.

Alternatively, the 4,436.65 price area is broken to the downside and the ADI continues to slide. In that case the next key area to watch for support is around the 61.8 per cent Fibonacci retracement of 4,383.45. That would put the ADI very close to support of its long-term downtrend line, which it rallied above in early-December with conviction.

Stocks to watch

Ajman Bank was down 2.0 per cent last week to end at 1.47. The stock continues to retrace the previous 31.6 per cent two-day spike from a month ago. That rally triggered a breakout of a double bottom trend reversal pattern (above 1.42) and occurred on seven-week high volume. More importantly, the spike put Ajman Bank above its 55-day ema for the first time since April of last year. That could be the beginning of a long-term trend change as the stock had been declining since March 2014 when it hit a peak of 3.57. Last week’s low of 1.42 is the low for the pullback so far. That put the stock 18.9 per cent off its spike high.

Given the above, a continuation of the early-January rally becomes likely once the current pullback is complete. The first sign of strength is on a move above last week’s high of 1.52. A daily close above that price level confirms strength and increases the odds for a continuation higher. If last week’s low is the low of the pullback, and the next rally at least matches the price appreciation in the first rally, then Ajman Bank could eventually hit 1.84 at a minimum.

Bruce Powers, CMT, is chief technical analyst at www.MarketsToday.net. He is based in Dubai.