Last week Dubai Financial Market General Index (DFMGI) dropped by 65.03 or 3.4 per cent to close at 1,844.89. That’s the largest one-week decline since May 2012 and a clear signal that further downside is likely in the coming weeks and maybe months.

Volume picked up from the prior week and market breadth was clearly on the bearish side with 25 declining issues and only seven advancing. The week ended with sellers dominating and the close was at the low of the weekly range. This would indicate there is a good chance the selling will continue in the early part of this week.

We now have a clear breakdown from the bearish double top reversal pattern discussed in prior weeks as the index closed below the 1,860.44 pivot support level. This pattern indicates a potential minimum decline to at least 1,761.51, which puts the index in the range of a support zone from approximately 1,778 to 1,755. That zone consists of resistance from the peak from March 2012 and the 38.2 per cent Fibonacci retracement of the medium-term rally off the June 2012 low.

There is a lower support zone that now has taken on a little more significance as the 200 daily exponential moving average (ema) is in a similar price area. It runs from around 1,706.60 to approximately 1,691.64. The 200ema is now at 1,702.08.

The structure of the 14-month uptrend off the January 2012 low will remain intact as long as the DFMGI stays above 1,575.28. Further declines from last week should be seen as a normal correction within a larger uptrend and once complete the uptrend can be anticipated to continue.

Recent peaks of 1,947.33 and 1,959.37, which create the double top pattern and form a potential resistance zone of importance. At this point the top of the zone will have to be exceeded before there is any sign that the DFMGI has a chance to go higher. As time progresses there will be lower price levels that can be used for signs of sustainable strengthening.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) was higher by 22.3 or 0.75 per cent last week to close at 3,017.72. Given the overall price structure of the ADI, this is just a small bounce in a relatively sideways move over the past month or so.

Volume declined slightly last week from the prior week while market breadth started to lean towards the bearish side with 23 declining issues against 14 advancing.

There is also a potential double top reversal pattern on the chart of the ADI. However, a breakdown has not yet occurred as it has in the DFMGI and therefore no bearish trigger is signalled yet.

Given the clear bearish signal in the DFMGI it seems likely that selling could very well intensify in the Abu Dhabi market soon. Certainly, the odds of a decline are higher now than a move above recent highs.

Support of the double top is at 2,935.61 with a drop below there triggering a breakdown of the pattern.

A minimum target based on the pattern is at 2,802, while a normal minimum retracement of the 14-month uptrend from January 2012 could see the ADI down around 2,772.84. Potential support of the 200ema is now around 2,742.

The tops of the double top are the two recent peaks at 3,053.55 and 3,069.20. They create a resistance zone that needs to be surpassed before there is any bullish signal at this point.

Regardless, a further decline from here is healthy for the long-term trend and should be looked at as a positive.

A market that gets too far ahead of itself is prone to extreme drops. We want to see retracements on the way up to lower the odds of a sharp sustained sell off.

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