UAE markets: It’s time to be cautious

The Dubai Financial Market General Index (DFMGI) gained 54.85 or 2.32 per cent last week to close at 2,421.64, achieving its highest weekly close since November 2008.

Market breadth weakened as there were 17 declining issues and 12 advancing. That’s on a bullish move higher for the uptrend early in the week, as daily volume surged to a four year high. Thereafter, the index turned lower as upside momentum weakened. Even with the the four-day trading week volume on a weekly basis also reached a four year high. Sometimes a volume surge later into an uptrend is indicative of a top rather than supportive of a continuation of the trend. Given the weakness in price that could be the case here but we’ll have to wait and see.

For the past nine weeks the DFMGI has been heading higher and remains in an uptrend on a weekly basis, as the high was above the prior week’s high and the low higher than that of the prior week’ low.

Last week’s peak was at 2,500.56, now important near-term resistance. At the peak the DFMGI was up 37.4 per cent from the most recent swing low hit in early-April (rapid rise in only two months), and gained 55.2 per cent for the year. As of the close it is up 50.3 per cent for the year.

There are signs that the rally is starting to lose strength. For seven of the past 10 weeks the index has ended near the high for the week. Last week it closed below the 50 per cent level of the range. That’s after rallying to new highs on very high volume.

Further, the rate of price appreciation from the January 2012 low has accelerated noticeably since early-April. That rate of change is unsustainable and puts the DFMGI at risk of a correction. Whether this leads to further weakening in the short-term or a move to new highs comes first, remains to be seen. There is no sell signal yet but investors are urged to be cautious, especially given recent weakness starting to show in most equity markets around the globe including the US, Japan, Germany and the UK.

Weekly support is now at 2,366.79, followed by 2,265.81. A daily close below the higher price level would give a short-term bearish signal, while a drop below the lower level indicates that the nine-week uptrend may be starting to reverse. More significant support could be seen from 2,136.27 to 2,109.86, prior monthly resistance and support, respectively.

Given the above concerns about the health of the nine-week uptrend, a daily close above last week’s high is suspect. It would be healthy for the bigger picture of the index to have some consolidation or retracement soon. If it keeps going in the near-term the chance for a sharper drop when it ends increases.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) rallied 36.41 or 1.02 per cent to close at 3,599.29. Not a big move given the new closing high. Market breadth remained on the bullish side with 25 advancing issues and 18 declining, while volume was the lowest of the past six weeks. Both the degree of advance and volume are likely impacted by having only four trading days.

The high for the week was 3,623.54, just shy of a potential monthly resistance zone from approximately 3626 to 3723. Given that the zone is identified from prior multiple support and resistance levels from the monthly chart, it should be given particular significance. The chance of a top occurring around this zone is high. At the same time a decisive rally above the zone would be a very bullish signal. Although that does not seem likely before a correction of some degree ensues given the overall technical picture for the index and weakness in global markets.

At this point a drop below last week’s low of 2,558.78 would give only a minor bearish signal. The more significant support area is around 3,415.67, then the 3,370 area, both weekly potential support areas, given bearish signals if the has a daily close below the price level.

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