UAE markets hit the top - for now

Evidence continues to build that the UAE markets have hit tops for now and are preparing to enter a corrective phase lower or sideways. For the long-term trend this would be a healthy development.

Dubai

The Dubai Financial Market General Index (DFMGI) fell by 6.29 or 0.33 per cent last week to close at 1,909.92. Market breadth was essentially even with 16 advancing issues and 15 declining. The range was much the same as that of the prior week and volume dropped to the lowest level for this year. Overall, an indecisive week which didn’t provide much new insight as to what could happen next.

The one thing last week’s action did is further develop the potential double top reversal pattern that looks to be setting up on the chart for the index. This is one of the classic trend reversal patterns that frequently occurs at market tops. If it does follow through as anticipated it would signal a reversal of the uptrend begun from the June 2012 low of 1,425.34. The pattern is not validated until we see a daily close below the mid-point or neckline support at 1,860.44. At that point the odds increase that the DFMGI would continue lower from there.

We can determine a potential target from the double top pattern by taking the distance in price from the high to the neckline, then subtracting that difference from the neckline. This gives us a minimum target, just based on this double top pattern, of 1,761.51. That’s right within the support zone from 1,778 to 1,755, mentioned in previous weeks. The next area to watch for support below that zone is 1,706.60.

Resistance is at the recent high of 1,949.37. A decisive move above that level would have the index next targeting higher potential resistance areas. The first being 2,000.72, then 2,201, followed by 2,408.90, the peak from back in October 2009.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) dropped by 34.95 or 1.15 per cent to close at 2,995.42. Volume dropped from the prior week as it has sequentially for the past five weeks, while market breadth was relatively even with 18 advancing issues and 16 declining.

Last Sunday the ADI made another attempt to go higher, rising above the highs of the previous two weeks, before hitting resistance and selling off the remainder of the week. The index ended near the low of the weekly range but above the lows of the prior two weeks.

As with the DFMGI, the daily chart of the ADI now shows a potential bearish double top pattern forming. A breakdown is triggered below support of the neckline at 2,935.61. Based only on the pattern a potential minimum target would be 2,802.

The larger uptrend in the DFMGI began off the January 2012 bottom at 2,293.38. Given the time it took to develop it is the most significant uptrend. Therefore, potential support levels derived from using this trend have some significance. Fibonacci ratio analysis indicates that a minimum retracement of this trend should be to the 2772.84 price area. That would complete a 38.6 per cent retracement of this 14-month trend, generally considered the minimum that could be expected with a high probability once a trend reversal is indicated. Giving further significance to that price area is the peak from June 2011 at 2,777.21, which is now an area of potential support as the market drops towards it.

A rise to above the recent high of 3,069.20 would need to be seen before there is another bullish signal that could see the market continue higher from there. The next potential resistance zone would then be up around the 3,270 area. That was the rally peak from back in October 2009.

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