The Dubai skyline as seen from Al Jaddaf. Photo for illustrative purposes only Image Credit: Virendra Saklani/Gulf News Archives

Dubai: Regardless of the shortened three-day trading week, the bear market continued in Dubai with the Dubai Financial Market General Index (DFMGI) falling 88.39 or 3.31 per cent to end at 2,580.27. This is the second week in a row where the index fell more than 3.0 per cent. There were only five positive issues, while 30 declined. Weekly volume fell given the shorter week. For the year, the index has fallen 23.4 per cent, and it is down 31.2 per cent from its 2017 peak of 3,738.69.

Of greater significance than last week’s performance however, is the fact that the DFMGI has not only closed below the prior long-term swing low support of 2,590.72 from January 2016, but it has closed below it on a weekly basis. As the index fell last week there was no sign of support at the 2016 lows. This is contrary to the clear support seen in 2016 as the index quickly turned higher back then and moved into a sustained rally. Technically, last week’s action is long-term bearish a continuation of the decline that began off the 2014 highs has been triggered. Therefore, the possibility of an acceleration in downside momentum has increased. Further, any chance for a recovery has been extended into the future as there is no sign of a bottom.

Looking back at previous price action, there may first be some degree of support seen around the monthly price area of 2,409. That’s where resistance was seen at the peak from October 2009 and now it may be a support area. Nevertheless, there is no further evidence for the potential significance of that price zone and therefore it is not likely an area that will hold for the long-term.

Further down, is a price zone that is identified by multiple months in the past as either support or resistance, and it includes a 127 per cent Fibonacci extension of the 2016 rally, and the 78.6 per cent Fibonacci retracement of the long-term uptrend coming off the 2012 bottom. That price zone is approximately 2,243 to 2,174. Fibonacci ratio analysis is used to mathematically identify potential support and resistance zones using specific ratios that are applied to prior price swings. When more than one measurement identifies a similar price area then it is considered to have greater potential significance and therefore we could see a reaction from price once it is reached.

The above price zone can therefore be looked at as a likely minimum eventual target following last week’s bearish long-term trend continuation trigger. This doesn’t mean that the DFMGI won’t continue lower, just that once the zone is reached there is a greater chance for a reversal of some degree and investors should watch for signs of such a reversal at that point, if it is to occur.

Abu Dhabi

Abu Dhabi continues to hold up much better than Dubai. Last week the Abu Dhabi Securities Exchange General Index (ADI) rose by 106.60 or 2.23 per cent to close at 4,876.68. This, after a sharp sell-off the prior week that took the index below key support. There were 14 advancing issues and 15 declining, while volume fell to a five-week low given the three-day trading week.

The ADI remains at risk of seeing a deeper pullback following the drop below 4,836.08 two weeks ago. If it does continue lower the price levels that can be watched for some degree of support include a price zone from approximately 4,721 to 4,505, followed by 4,414. However, the 4,244 to 4,174 area is key as that’s the lower end of a consolidation zone that formed the past couple of years. Subsequently, a breakout was seen in July.

At the same time, we could just see further consolidation in the ADI as the bulls and bears continue to fight it out within a price range.

For those students of technical analysis and charting, the topping pattern that has occurred in the ADI over the past several months is a broadening top. A breakdown occurred two weeks ago but has not yet followed through as much of last week’s activity is contained inside the pattern.

Stocks to watch

You can get an idea of where the DFMGI could be heading by looking at the chart of the Dubai Financial Market. It broke below its January 2016 low in the second quarter of this year. After a short lived subsequent bounce, it continued to fall, and is now fast approaching its 2012 low of 0.678. Last week the stock was down 0.05 or 6.02 per cent to close at 0.78.

Although the trend patterns are not exactly the same as what we see in the DFMGI, there is a similarity as each found a significant low in January 2012 and January 2016. Also, they each topped around the same time after various rallies that occurred on the way down off the 2014 highs. Therefore, we can say that the Dubai Financial Market has been leading the index. In that case, changes in the pattern of the Dubai Financial Market may provide an early indication of what might be coming to the broader market.

Bruce Powers, CMT, is a technical analyst and global market strategist.