Buyers continued to push UAE shares higher last week with the market indices each showing strong performance. Key resistance levels were penetrated with the week ending near the highs. While this is bullish behavior for the medium-term the UAE markets are extended into very overbought territory with a correction overdue.
The Dubai Financial Market General Index (DFMGI) rallied 95.29 or 5.32 per cent last week to close at 1,887.59. That’s a three-year high and it’s strongest weekly performance since February 2012.
Last week’s high was 46.1 per cent above the January 2012 low of 1,294.10. Buyers dominated throughout the week with the index closing near the high for the period, while volume was strong, reaching the 10th highest level of the past two years. Strength was widespread with 21 advancing issues and nine declining.
The DFMGI is now the most overbought in at least five years on the weekly chart, and is also into high territory on the daily chart. Markets can remain overbought and still go higher, but the risk of a pullback continues to rise. It could come in a week or several weeks, but it will come.
Typically sharp rallies, as seen in the DFMGI since the beginning of the year, are followed by prolonged pullbacks and sometimes steep declines. That has certainly been the case with the DFMGI over the past several years as the index has fluctuated near the bottom of its long-term trend with a downward bias.
There is a key change that has now occurred however as the index has closed above three prior peaks, indicating a likely long-term change in trend, from a downtrend to an uptrend.
Further, a bullish medium-term (one-year in this case) trend continuation was signaled last week as the index closed well above its 2011 high of 1,778.25. Given these signs above the pullback when it does come should be less than typically seen over the past several years and should complete in a shorter time as buyers jump in earlier and more aggressively given the trend change.
The DFMGI closed last week right in the area of prior resistance, 1,887.21, from late-March 2010. Technically it closed just above that level. Therefore, there is no increase in selling pressure evidenced so far, meaning the index could still continue higher in the short-term. The next resistance area above last week’s high of 1,890.87 is around 2,201, followed by 2,408.9.
In previous weeks we’ve discussed the target for a measured move as being around 1,909.49. This is where the second leg up off the January 2012 bottom matches the price appreciation of the first leg and would mark the next closest potential resistance level above the 1,887.21 peak.
Last week’s low of 1,791.46 is the first level of potential support. A daily close below that level increases the likelihood of further declines, with a minimum drop to the 38.2 per cent Fibonacci retracement level around 1,713 likely.
Last week the Abu Dhabi Securities Exchange General Index (ADI) saw a 98.78 or 3.55 per cent rise to close at 2,881.78, just shy of a three-year closing high. That was the strongest performance since early February 2012 and puts the index 25.5 per cent above the January 2012 low. Volume was also strong, reaching its the ninth highest level in two years, while advancing issues were a little more than twice declining at 30 and 14, respectively.
The ADI ended the week with the buyers in charge, closing near the high of the weekly range. It is now approaching the next potential resistance zone around 2,944.45. After that the next area of resistance is around 3,262.92. It is now the most overbought of the past five years on the weekly chart and therefore the risk of a pullback in the coming weeks is high.
As with the DFMGI, the ADI is showing signs of completing a long-term bottoming process and reversing its six year downtrend. This is bullish behavior and bodes well for the long-term outlook. Keep in mind however that a bottoming process can take some time to develop before the uptrend is well in place.
Weekly support is now at 2,783.37. A drop to below that level could take the ADI down to the prior peak around 2,707.67, at a minimum. That would also just about complete a 38.2 per cent Fibonacci retracement (2,702.68) of the uptrend begun from the June 2012 low.
Stocks to watch
Eshraq Properties broke out of a two-month bullish symmetrical triangle consolidation pattern last week, rallying 18.6 per cent for the week and closing at Dh0.51. Even though this stock has just started to move again it is coming out of a very bullish pattern which should lead to further upside. By taking a measurement of the first part of the rally begun in early-November 2012 we can estimate a potential target of around Dh0.65, or 27.6 per cent above last week close. An alternative method, using the triangle, indicates a lower target of around Dh0.58.
Deyaar Development and Dubai Investments have each been consolidating in a tight formation over the past month following a strong rally. These patterns may have more time to develop or they could breakout soon. A daily close above Dh0.392 for Deyaar, and above Dh0.972 for Dubai Investments, signals and upside breakout.