Dubai: Last week the Dubai Financial Market General Index (DFMGI) fell by 68.55 or 1.89 per cent to close at 3,563.99. That’s the largest decline in about eight months! Market breadth was clearly on the bearish side with only six advancing issues and 30 declining. Volume was up slightly from the prior week.

A breakdown of the rising bearish wedge discussed in last week’s column was triggered last week as the index fell below 3,625.17. Subsequently, it accelerated its decline before finding support around the most recent swing low of 3,560. The low for the week was 3,554.21. That low was hit on Monday and tested throughout the rest of the week, and it held. However, there was not much of a bounce in the interim reflecting little buyer enthusiasm. Also, the close for each of the last three days of the week was close to the low. This is all bearish behaviour which could easily lead to lower prices in the near-term.

Of further concern, we now have a bearish potential double top formation in the chart of the DFMGI. The first top was eight weeks ago and the second three weeks ago. This pattern is a classic trend reversal pattern. Nevertheless, it is not confirmed until there is a breakout and subsequent daily close below support of 3,560. Until then the index could continue to consolidate and evolve into a different pattern or a larger double top.

Once triggered this pattern indicates a minimum target of around 3,439. When combined with the 61.8 per cent Fibonacci retracement of the uptrend coming up from the early-June swing low, we get a likely minimum target zone of around 3,439 to 3,423. Fibonacci ratio analysis is used to analyse market swings to find mathematically calculated potential support or resistance zones.

If that price zone doesn’t halt a decline then next watch for support around the 3,371 monthly support area. That price level is then followed by the most recent swing low of 3,264.36, and then 3,195. At the same time a daily close below the price range turns the outlook for the index intermediate-term bearish.

Compounding the near-term bearish outlook is the bearish signal on the monthly chart that will occur is the double top is triggered as the index will have fallen below the August low. Last week the DFMGI fell below August’s low but by little and then it ended above it. A daily close below it provides another bearish signal.

Any further bounce by resistance and therefore is not telling about what comes next. However, a daily close above last week’s high of 3,636.06 opens up the possibility of an attempt to continue higher. Until then, resistance is likely to turn the index back down during any bounce.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) dropped by 57.69 or 1.29 per cent last week to end at 4,397.40. Volume fell to a four-week low while 11 issues advanced and 23 declined.

The ADI triggered a bearish trend continuation last week and it closed essentially at the low for the week, which was at 4,396.42. This puts the index in a precarious position as it looks like the 2017 support zone of 4,358.36 to 4,355.26 will be tested once more. Two earlier declines in 2017 ended at that support zone and were followed by decent rallies. This time it may hold again or not.

It is a concern as the ADI has formed a large bearish descending triangle consolidation pattern this year. The top of the pattern is marked by a falling trend line representing progressive selling pressure that ended the rallies. Typically this pattern will breakout to the downside, eventually. We’ll have to wait and see if that is the case here.

At the same time the pattern could continue to develop and lead to another rally off that price support zone. In each of the prior two cases price was rejected around that support zone fairly quickly. If similar behaviour is seen this time then the case for a subsequent rally is enhanced. If not, then maybe we see a stall and short-term consolidation before the ADI breaks down from the pattern. If that occurs then the next key support zone is down around the 2016 lows of 4,179 to 4,174.

Stocks to watch

Aramex attempted a breakdown from a potentially bearish double top trend reversal pattern last week but quickly recovered to close back up inside the pattern and near the high for the week. The stock was the strongest performer in the Dubai market, up 4.85 per cent to end at 4.98.

Caution is now warranted as another test of last week’s 4.75 low could end in failure and lead to accelerated selling on the downside as the bearish double top is triggered. A daily close below that low confirms a bearish breakout. The minimum target just based on the pattern is then around 4.20.

If instead of weakness we see further strength then the double top consolidation pattern may be evolving into a different pattern, possibly a rectangle for example. The next sign of strength is on a move above last week’s high of 5.00, and then above the two-week high of 5.02.

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