Dubai Financial Market and Elliot Wave theory

The Elliot Wave Principle is a detailed description of how financial markets behave. It reveals that mass psychology swings from pessimism to optimism and back in natural sequence, creating specific Elliot wave patterns in price movements. Ralph Nelson Elliot isolated thirteen patterns of movement, or “waves” that recur in market price data and are repetitive in form but not necessarily in time or amplitude. Each pattern has implications regarding the position of the market within its overall progression, past, present and future.

He defined that in markets, progress ultimately takes the form of five Elliot waves of a specific structure, with corrections represented as three waves.



Every wave in the structure has its own characteristic which reflects the psychology of the moment. The definitions below are based on a bull market in equities; the characteristics apply in reverse in bear markets.

WAVE 1: Wave one is rarely obvious at its inception. The fundamental news is negative. The previous trend is considered still strongly in force. The economy looks weak and sentiment is still bearish.

 WAVE 2: It corrects Wave 1. The news is still bad. Volume is lower than Wave 1 and prices must fall in three waves.

WAVE 3: The news is now positive and fundamental analysts start to raise their earnings estimates. Prices rise quickly. Corrections are short-lived and shallow. By the Wave 3 midpoint, “the crowd” will join the new bull trend. Wave 3 often extends Wave 1 by a ratio of 1.618 or 2.618.

WAVE 4: The dominant trend is considered up and a correction hits the market as a surprise.

The correction shape is different than in the second wave of the same degree, resulting in an “Alternation in shape.” Usually it’s a fast and sharp drop or a sideways move. Typically it retraces less than 38%.

WAVE 5: The final leg in the direction of the dominant trend. The news is positive and everyone is bullish. If Wave 5 is extended it extends Wave 1 to Wave 3 by a ratio of 1.618.  

WAVE A: Fundamental news is positive. Most analysts see the drop as a correction in a still active bull market.

WAVE B: Prices reverse higher which many see as a resumption of the now long gone bull-market. Fundamentals are not improving but they are not turning negative.

WAVE C: Volume picks up. The market drops sharply and almost everyone realizes that a bear market is here. Wave C is typically at least as large as Wave A and often extends to 1.618 times of Wave A



The Dubai financial market index, DFMGI, bottomed in January 2012 and went up on a Wave 1 trend, rising by nearly 35% before going on a downtrend that lasted for 14 weeks before bottoming in Wave 2.

Wave 3 extended Wave 1 by more than 1.618 and less than 2.618. Wave 4 retraced less than 38% with the unpleasant news of the Syrian crisis. Wave 4 alternated in shape with Wave 2.

Wave 5 is extending and a typical target based on the ratio between the waves with reference to the Elliot wave theory will be between 5400 and 6000.

Based on the analysis of Elliot waves there is a high probability that the index will rise above 5000 points to peak at the top in the coming months.



About Firas Al Zghaibi:

Firas Al Zghaibi operates within the Sales, Brokerage & Business Development department as a Markets Strategist at Menacorp. He has more than 8 years of experience in advising clients and performing Trading Technical Analysis and Portfolio Management for GCC, MENA and Global Equities and FX & Commodities. Firas started his career in the UAE as Portfolio Manager and Technical Analyst for the Bin Zayed Group before joining Mubasher Financial Services (MFS) as Research Manager before being promoted to Head of Advisory for UAE branches.

Firas holds a Bachelor of Science in Computer Science from Al Ahliya Amman University in Jordan and a Chartered Market Technician certificate.



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