Pullback a normal phenomenon

Dubai: The Dubai Financial Market General Index (DFMGI) declined by 39.44 or 2.6 per cent last week to close at 1,475.58. Weakness was widespread with 25 declining issues and only six advancing. Even though the DFMGI continues to sell off, volume is also declining, reaching its lowest level since the bottom in mid-January. This is supportive of the idea that we are just seeing a normal pullback in the index and that investors are not running out of the market en-masse. Keep in mind that this can change particularly given the bearish sentiment now apparent in the global equity markets.

Last week, the DFMGI completed a 61.8 per cent Fibonacci retracement (1,479.05) of the uptrend off the mid-January low. Support for the week was at 1,456.53, which was in a price zone from back in early-July 2010. Many times markets will retrace as much as 62 per cent of a prior trend before finding price support that leads to a reversal. Although the probability that these price levels will hold the low is good at this point, it doesn't ensure that it will happen.

In addition, the DFMGI surpassed the target from the symmetrical triangle pattern discusses a number of times in previous columns. A minimum target of 1,501.81 was indicated with the triangle pattern outlined by two lines converging towards one another in the accompanying chart. This pattern turned into a top once price fell below 1,617.30. That was the downside pattern breakout signal indicating that the probability of even lower prices had increased. Since then the DFMGI has accelerated its decline. If the DFMGI does manage to trend below last week's low, then there are several areas where support could be found including 1,429.55, 1,413.76, and 1,397.71. Each level comes from previous support or resistance.

The 11-week downtrend remains in place until the DFMGI closes above weekly resistance of 1,515.02. An earlier signal of strength is on a close above daily resistance of 1,490.62. Potential resistance of the 200 daily exponential moving average (ema), an indicator for the long-term trend, is around 1,533.30.

Abu Dhabi

Last week, the Abu Dhabi Securities Exchange General Index (ADI) continued to creep lower falling 10.3 or 0.42 per cent to close at 2,467.85. Market breadth was slightly on the bearish side with 21 declining issues versus 15 advancing. Although volume was higher than the prior week, it remained relatively low.

Price support was found at 2,464.75, thereby completing a 50 per cent retracement (2,468) of the uptrend off the mid-January low. That support area is confirmed by previous support of 2,469.83 from mid-August 2010.

Even though the ADI didn't go through that support level it closed very close to it and near the low of the weekly range. This reflects selling pressure remaining through to the end of the week. There's no indication at this point that the 2,464.75 price area will hold. It could very easily be broken to the downside with the ADI then targeting the next support level of significance. In this case though there are some minor support levels very close to 2,464.75. So, a break below there needs to show some downward momentum to signal that the index might keep dropping.

Always keep in mind that any support or resistance price level should be looked at as an "area" of price. There are always a number of different price levels that can end up seeing buyer support or seller resistance. This column is attempting to highlight the more significant "potential" price levels that should be watched for a possible reversal of an uptrend or downtrend. A reversal may lead to a bounce, or a sustainable trend reversal.

A decisive decline below last week's low will see the ADI next target the 2,427 price area, consisting of the target measured from the double top reversal pattern seen on the daily chart (2,428), and the 61.8% Fibonacci retracement (2,426) of the January uptrend. Given that these two analysis methods identify a price support level within two points of each other, the probability that the ADI will find significant support there increases. This means that the odds are good for a reversal to the upside at that point. Slightly below this support area is previous support or resistance from around 2,417 to 2,412.50.

At this point a rally above 2,480.81, last week's high, will give the first sign of strength that could lead to a higher bounce. Above there is weekly resistance around 2,501, followed by 2,520.60. The ADI would need to close above the higher price before there is any confirmation that a sustainable rally might be in place.

Stocks to watch

A number of stocks that saw strong rallies earlier in the year have since seen significant moves lower nearing previous lows. These include Dubai Islamic Bank, Dubai Investments, and Drake and Scull, to name a few. This is a sign of relative weakness for these stocks as well as other listings that have seen similar price behaviour.

Dubai Islamic Insurance has rallied recently as the market has weakened. This is a sign of relative strength. A pullback lower could present another opportunity to enter, assuming the market turns higher near-term. Tamweel has continued to form a 10-week bullish symmetrical triangle. A breakout higher is first indicated above resistance around Dh1.28, and move lower below support around Dh1.12.

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

Stock market investments are risky and past performance does not guarantee future results. Gulf News does not accept any liability for the results of any action taken on the basis of the above information.