Recent gains are at risk as UAE markets respond to selling pressure at key resistance levels. Higher targets for the counter-trend rally have been reached and we can expect further profit taking to dominate. At the same time oil began to rebound at the end of the week, which could help keep bearish sentiment contained for now.

Dubai

The Dubai Financial Market General Index (DFMGI) dropped by 76.94 or 2.52 per cent last week to end at 2,981.48. Market breadth reflected the weakness, with 25 declining issues against 10 advancing, while volume fell to a seven-week low.

Resistance for the week was at 3,124.69, which may have put an end to the recent rally. At that peak the DFMGI had jumped 20.6 per cent off the January swing low of 2,590.72, and retraced approximately 89 per cent of the prior down swing. The peak occurred in a resistance zone that included a combination of the 200-week simple moving average (sma), now at 3,155.84, plus the long-term uptrend line and the intermediate-term downtrend line. Although the DFMGI was able to stay above the 55-day exponential moving average (ema) for most of the week, a sign of short-term strength, by Thursday the market capitulated, falling to a six-day low and clearly back below the moving average. Further, the index closed near the low for the week, which was at 2,963.72.

Of greater concern is the DFMGI’s behaviour of recognising previous long-term support as resistance. Back in the first half of January the DFMGI dropped below two important trend indicators that represented dynamic support at the time, the 200-week ema and the long-term uptrend line that starts from the January 2012 lows. Last week’s price action tested these lines as resistance. This is typical price behaviour that frequently leads to a continuation of the original direction, which is down.

Confirmation of weakening

These are just the early signs that the rally may be done, at least for now. Next watch for further confirmation of weakening. This will next occur on a daily close below 2,975.55. The DFMGI would then be targeting a weekly price level around 2,857. A daily close below that level will give another bearish signal, with the index then heading towards the 2,800 area (neckline of a small inverse head and shoulders chart pattern). Starting from the neckline, and down to the January low at 2,590.72, the DFMGI hits a consolidation zone where there are no distinct support levels. At this point that price zone has the best chance of turning the index higher, at least for a short-term bounce.

The key price level is the January low, as a drop below it signals a continuation of the long-term downtrend. Since the long-term trend indicators mentioned above have been broken to the downside, and it happened recently, the odds for an eventual decline below the January low is high.

On the upside, a jump above and daily close above last week’s high of 3,124.69 changes the above bearish scenario. At that point the DFMGI will have to get above the most recent swing high at 3,188.83 on a daily closing basis to start to turn the outlook to bullish.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) dropped by 68.97 or 1.67 per cent to close at 4,071.80. Rather than falling as we see in Dubai, volume spiked to the highest level since late-April 2014. A majority of 20 issues weakened, while 14 advanced.

The ADI was unable to advance beyond the prior week’s high of 4,147.32, which put the index 11.1 per cent above the January low of 3,731.56. Although not yet confirmed it looks like that high could put an end to the rally that started three weeks ago. It occurred right around resistance of the 200-week ema, price has now held below that resistance for two weeks, and the index ended the week in the bottom quarter of the week’s range, and on higher volume.

A drop below last week’s low of 4,046.94 will provide the next sign of weakening, with the ADI then targeting weekly price levels of 3,954 to 3,915. Of greater significance is the two-week low 3,915.68. If that price is broken to the downside then the ADI will be back below both the 200-week sma and long-term uptrend line.

Alternatively, if the ADI makes a decisive move above the two-week high it heads into 4,202 resistance of the 21-week ema, and the more significant swing high at 4,313.78 from late-December.

Stocks to watch

We see confirmation of weakness in market leader Emaar Properties. The stock was down 0.74 per cent to end at 5.36, with volume rising to a three-week high. Last week’s high of 5.76 was right at resistance represented by both the 21-week ema and an intermediate-term downtrend line, and the stock closed near the low (5.26) of the week’s range. The next target is the two-week low of 4.97, followed by 4.89. If last week’s low is broken then we can anticipated a decline to a minimum of the 5.00 area, as that would complete a 50 per cent retracement of the recent rally. Alternatively, a decisive rally above last week’s high will have the stock heading towards 5.88, with a chance of rising above it.

 

Bruce Powers, CMT, is president of WideVision and chief technical analyst at www.MarketsToday.net. He is based in Dubai.