The UAE stock markets have had a sharp correction in the past few weeks, but could well bounce back in September or October, after a trading lull during Ramadan and the traditionally slow summer months of July and August.
The markets have rallied strongly since the beginning of 2013, making up ground following a five-year period of essentially treading water, while other markets around the world recovered from the global financial crisis.
One of the main drivers of this rally was MSCI's decision to reclassify the UAE as an emerging market, an upgrade from frontier market, putting the Dubai and Abu Dhabi exchanges on a par with markets such as Brazil, Egypt, South Africa, China, India and South Korea.
The move was a vote of confidence to the markets, following a review of market rules, regulations and functioning, and of criteria such as foreign ownership rules, convertibility of local currency, and market liquidity. Being classified as an emerging market opens the door for much more investment from global institutional investors through professional fund managers.
The chart details the price performance of the Dubai Financial Market General Index over 10 years. Over two years from the beginning of 2011, the index experienced what is often called a "head and shoulders" pattern. This is a classic base formation that often leads to a strong rally.
The rally began in earnest at the start of 2013, with the index sailing through the key resistance level at 1,800 points (the previous peak in the “head and shoulders” formation). A head and shoulder chart pattern signifies a reversal. In this case it formed at the bottom of the market. So it signified a reversal to the upside. Once the pattern completes (which happened when index moved above 1,800) it is followed by a rally. Since that point onwards we are seeing the rally in the market.
A small correction then ensued at around 2,400 points in mid-2013, as geopolitical tensions related to Syria resulted in a sharp sell-off, but the rally soon resumed. Since then, the market roared ahead, clearing the strong trend line resistance at 3,000 levels, and reaching 5,400 points after that strong break-out.
Following the UAE’s actual entry into the MSCI Emerging Markets Index (the original decision was communicated in 2013), investors have taken profit, and the DFMGI has experienced a sharp correction. So is this just a breather or the start of a prolonged fall?
The holy month of Ramadan is traditionally a time of very low trading volumes, and this is likely to extend into August this year. During that period, I would expect the Dubai index to meander lower towards the 200-day moving average – a widely followed technical indicator that will now serve as a key support and stands at the 4,000-point level at present. To maintain its long-term trend, the index needs to bounce up from the nexus of this moving average and the long-term trend line, which is at present at the 3,500-point level.
Such a pullback to long-term averages are considered as healthy corrections and are an integral part of strong uptrends. As long as the index can hold above the 3,500-4,000 level strong, its medium to long-term uptrend will remain intact and the latest weakness will be regarded later as just a short-term correction.
Aksel Kibar is a technical strategist at Invest AD
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