Bearish signals triggered in UAE markets

Dubai: Last week the Dubai Financial Market General Index (DFMGI) dropped hard, ending down 109.19 or 2.95 per cent at 3,588.49, with a low for the week at 3,576.90. Volume, however, was muted as it fell to a three-week low. This was the worst performance in 10 weeks, with most listing closing lower. There were 30 declining stocks and only three advancing.

A clear bearish signal was given last week as the DFMGI broke below the two-month uptrend line and ended the week at a four-week low. The index is now heading for the first key support level, which is around 3,503. That price area was support over several weeks since August, and therefore potentially significant. This means that either there should be a good bounce from that price zone, or support doesn’t hold and the index drops below it and heads towards lower price levels. If it is hit and leads to a bounce, its possible the DFMGI could continue to trace out a consolidation pattern that has been forming since early-September. On the other hand, the health of the eight-week rally is now in question.

One indicator used to determine the intermediate-term trend and therefore the outlook for the index is the 55-day exponential moving average (ema). Resistance around the 55-day ema (now at 3,720) has been tested over nine days in the past several weeks and managed to stop the prior ascent during that time. As of last week selling intensified and turned the DFMGI down. This would indicate that the 55-day ema is a useful indicator for future resistance if the index rallies up towards it again, and that the rally off the August 3,241.35 swing low may have topped.

The most recent peak hit two weeks ago is at 3,739.85. But, there was a slightly higher peak of 3,762.85 reached at the end of August. Note that the second peak is lower than the first, by itself a sign of weakening.

Further compounding the potential bearish nature of last week’s price action is the large bearish flag pattern that the DFMGI broke down from in August. There has only been one leg down since that breakdown, and it would be common to have a second leg down.

The bear flag takes the form of an ascending parallel channel with upward sloping trend lines across the bottom and top of the channel. A breakdown occurred once the index dropped below the lower trend line. The October peak was a test of that trend line to see if resistance would be seen around it (previous support becomes resistance), and it was. The same price resistance area also happens to coincide with a test of the 55-day ema. Plus, there is the lower second peak noted above.

Together, this analysis increases the likelihood that the DFMGI will test the support area of the 200-week ema (now at 3,387) and August 3,241.35 low, eventually. And, it’s possible those support areas could be exceeded to the downside, as the long-term uptrend line starting from the January 2012 low has not yet been tested as support. If it happens to be approached within the next four-to-six weeks it would coincide with the 2,992.53 support level from the December 2014 swing low.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) dropped by 53.06 or 1.17 per cent last week to close at 4,485.40, its weakest performance in six weeks and a three-week low. Market breadth was bearish, with 22 declining stocks and eight advancing, while volume was slightly below the prior week and at the lowest level in at least a year.

Of significance is the breakdown of an ascending wedge pattern, as there was a decisive decline below and weekly close below 4,516.27. This pattern indicates a minimum target of around 4,337.91, the beginning of the wedge, with the next minor level at 4,462. Even so a test of the 200-day ema (now at 4,219.76), and the 4,069.11 August low has become more likely at some point.

As with the DFMGI, the long-term uptrend line for the ADI has not yet been tested. If the August low is exceeded within the next four-to-six weeks a test of that line is likely, and will coincide with December 2014 support around 3,876.44.

Stocks to watch

Given the analysis above this is the time for investors to review their risk management procedures and take appropriate action to protect profits.

The banking and investment sectors are starting to look particularly vulnerable as some of the sector indices have broken down from consolidation patterns, pointing to further downside. Specifically, Dubai Islamic Bank ended the week at 6.66, below 6.68 support. First Gulf Bank ended below 13.65 support, at 13.50, and the low of the week, while Amlak Finance dropped out of a symmetrical triangle, ending at 1.93, down 5.4 per cent for the week. The Dubai Financial Market was down 9.6 per cent, ending at 1.60, a seven-week low. That followed a decline to 1.59 earlier on Thursday, an eight-week low.

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