The Dubai Financial Market General Index (DFMGI) plunged 138.13 or 5.85 per cent last week to close at 2,222.46, its largest one-week decline since March 2012, and a six week low. Emaar Properties, the largest index component, contributed to the fall with its biggest drop since March 2012, ending 6.14 per cent lower. Volume fell to a nine-week low but remained in the upper range of the past several years. Weakness was widespread with 27 declining issues and only four rising.

Earlier in the week the index tested a weekly support zone at 2,182 and managed to hold above it the remainder of the week with barely a bounce. That low was 12.7 per cent off the high of 2,500.56 from a month ago.

Downward pressure remains with the DFMGI likely to see further weakness given the intensity of recent selling and the overall bearish technical picture. Of course there will be short-term rallies but the immediate trend is down.

The index is next targeting a potential monthly support zone from around 2,136.27 to 2,109.86. Just below there is the 38.2 per cent Fibonacci retracement level of the full uptrend at 2,037.92. Near-term resistance is at last week’s high of 2,365.43. A daily close above that level would be needed before there is any confirmed indication of strength.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) retreated by 91.89 or 2.53 per cent to close at 3,540.47, the largest one-week drop since December 2011. Most listings participated in the sell off with 33 declining while only six advanced. Although volume fell slightly from the prior week it remained at the high end of the three-year range.

There are indications that the ADI could be heading into a prolonged retracement and consolidation. Let’s step back and take a look at the structure of the one-and-a-half year uptrend that began off the bottom of 2,293.38 in January 2012. As the trend has matured the rate of price appreciation has accelerated. The first accelerating point was around early-January of this year when the index reached a two-year high. Then again in early-April the rate of appreciation increased before topping out at 3,678.08 two weeks ago. That top could still be exceeded in the near-term but it looks more likely that a correction has begun.

It is not uncommon in financial markets to see an uptrend progress with three distinct rates of accelerating price — three angles of ascent or three trends, all part of a larger uptrend. We’ve seen that in the ADI. As prices move higher investor enthusiasm spreads with buyers becoming more aggressive and sellers less so.

We can see similar investor behaviour in the ADI during the corrective phases of the uptrend as declines become progressively shallower and complete faster. Since the January 2012 bottom the ADI has experienced three corrections; the first starting in March 2012 and lasting 13 weeks and declining 8.4 per cent, then about five weeks in November 2012 for a 4.6 drop, and most recently in March a four-week and 4.35 per cent correction occurred.

The correction to date off the recent peak of 3,678.08 has reached almost 4.9 per cent, with the index closing just above that price level last week — now important near-term support. A drop below signals further selling as more investors look to take profits accumulated from the strong rally as the fear of still lower prices takes over. Notice that the current correction has already exceeded the prior two, a sign that overall selling pressure is increasing.

To match the largest drop of 8.4 per cent during the uptrend the index would fall to 3,369.12, putting the ADI at potential resistance zone from the weekly chart between 3,369.21 to 3,370.07. Because of this that zone is a high probability near-term target for the ADI. A longer correction would then be indicated if that zone is exceeded to the downside.

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