Although performance was mixed for the UAE markets last week, the first signs of trouble are starting to show. This could be the beginning of an intermediate top leading to a correction going into the summer. The same can be said for leading equity markets in the U.S. Japan, Germany and the U.K. which all saw reversals during the last week.

Dubai

Last week the Dubai Financial Market General Index (DFMGI) gained 9.61 or 0.42 per cent to close at 2,305.62. Advancing issues maintained their lead at 23, while there were 11 declining issues. Volume surged to a three-year high, more indicative of a blow off top given the price performance rather than a sign for continued strong upward momentum. The DFMGI ended the week up 43.1 per cent for the year, and 78.2 per cent above the January 2012 low.

This is only the second time in the past eight weeks that the index closed in the bottom quarter of its range after first moving higher, a sign that selling pressure is building. It is a sign of weakness when an uptrend has been well established and volume clearly accelerates above prior levels, but price starts to show weakness. Further, the DFMGI has gotten very overbought on both the daily and weekly charts.

Resistance for the week was found at 2,367.19. That’s very close to the 2,408.9 long-term resistance zone discussed in previous weeks. As with all support and resistance levels, they should be looked at as approximate price levels.

The 2,408.9 level was the October 2009 peak of the first rally following the sell off from the 2008 financial crisis. Given the weakness expressed in last week’s price action it is fair to anticipate that we are again seeing resistance from sellers increase in that vicinity. The chance for a move lower from here, is much more likely than it has been over the past seven weeks.

This doesn’t mean the market goes straight down from here. Last week is just the first sign that further weakness may be coming. We now need to watch for additional signs to confirm the expectation. A daily close below last week’s low of 2,278.34 will give some confirmation. Short-term support is then around 2,183 to 2,171. Given the structure of the uptrend, especially since the December 2012 low, an eventual move down to at least 2,065/64 seems likely. The next lower support zone would then be around 1,960 to 1,819.

Alternatively, a daily close above last week’s high of 2,367.19 indicates short-term strength. However, potential resistance around 2,408.90 would still need to be breached for signs of sustainable strength. The next resistance zone would then start around 3,107.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) weakened by 53.81 or 1.53 per cent to close at 3,460.36. Uncertainty is now reflected in market breadth with 26 issues gaining while 21 declined. The ADI also saw a surge in volume, reaching its highest level in three years and near the highs for five years. Again, this is likely an early sign of a top being formed, especially since the index fell for the week. The ADI has gained 31.8 per cent in 2013, and closed 48.5 per cent from the January 2012 bottom.

Resistance was found last week at 3,569.77, a new high for the current uptrend and within the potential resistance zone identified in prior weeks from 3,551.94 to 3,577.74. That zone was resistance and support multiple times in the past as seen on a monthly chart. A daily close above last week’s high could see DFMGI progress to the top of the zone, but given the extent of the rally in 2013 it doesn’t seem likely it would be surpassed without a retracement or consolidation first.

Technically, on a long-term basis, the ADI has made greater progress than the DFMGI as it has already closed above its peak (3,269.92) from the 2009 rally, whereas the DFMGI has not done so. Therefore, short-term support for the ADI could be found around that level. However, given the overall structure of the uptrend a minimum decline to the 38.2 per cent Fibonacci retracement level at 3,192.66 can be anticipated if further weakening is seen in the near-term. That Fibonacci ratio is derived from the uptrend starting from the December 2012 low. Lower still is a potential support zone starting around 3,069 down to 2,935.61. A daily close below 3,428.93, last week’s low, would give the next confirmation for further weakening.

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