Dubai: The Dubai Financial Market General Index (DFMGI) gained 1.65 per cent last week to close at 4,813.06. Volatility continued to shrink, with the high to low range for the week contained within the prior week’s range. As to be expected, when volatility dries up trading activity drops as well. We can see this in the 50 per cent drop in volume from the prior week. Last week volume reached its second lowest level of the past year, and the lowest for a full week of trading. The majority of listings or 22 advanced, while 10 fell.

At some point volatility will pick up, signalled by a breakout of a five-week consolidation range. This is what astute investors will be watching for. The top of the range is more clearly defined at 4,934.24, than the bottom, as the lower part of the consolidation pattern is upward sloping. The upward slope is one of the factors that gives an upward bias to the DFMGI.

The lower end of the consolidation range or support can be identified, but is hasn’t yet been tested. That zone is from approximately 4,414.13 to 4,367, based on prior weekly lows.

Nearby support is at the two-week low of 4,706, with a daily close below that level pointing to additional weakness towards the lower support zone. The current consolidation pattern would continue to evolve until there is a daily close below the 4,367 price level. At that point the probability of even more aggressive selling increases, with a test of the July 1 corrective low of 3,730.91 possible.

On the upside, watch for a daily close above 4,935.95 as an indication of strength. This would signal a continuation of the six-week uptrend. The move should be decisive and would have the DFMGI next heading towards the 5,191.50 swing high from June 3.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) rallied by 127.8 or 2.59 per cent to close at 5,052.94. While the majority of listings advanced, volume fell to its lowest level of the past year, for a full traded week. There were 27 stocks that advanced and 16 declined.

The ADI’s six-week uptrend is continuing to strengthen but not enough to say that it is ready to continue higher just yet, although the odds favour further strength. Last week’s high exceeded the minor swing high from several weeks ago at 5,054.95, but the index has not yet had a daily close above that price level. That’s what’s needed next to have a more confident trend continuation signal. If it happens, the ADI will next be targeting a resistance zone from approximately 5,158 to 5,255.35, the peak of the long-term uptrend.

The short-term six-week uptrend remains in place until there is a daily close below the most recent swing low of 4,896.48. At that point the price structure of the uptrend is showing signs of weakening, and therefore prone to a further declines, first to around 4,817, then to the 4,719 price area. A test of the 4,452.83 corrective low from seven weeks ago remains a possibility as well.

Stocks to watch

A symmetrical triangle pattern has been forming in the daily chart of Shuaa Capital, right at resistance of the 55-day exponential moving average (ema), a trend indicator. This pattern reflects a steady decrease in volatility as both the upper and lower parameters of the pattern move closer together over time. Given this characteristic of the pattern there is a good chance that when a breakout occurs, in whichever direction, momentum or rate of change will noticeably increase.

An upside breakout is first signalled on a move above 1.27 and confirmed on trade above 1.32. Last week Shuaa ended at 1.25, higher by 2.46 per cent. Trade above the lower price level will also signal a breakout - above the 55ema, giving an additional sign that strength is coming back into the stock.

If an upside breakout occurs, Shuaa would first be targeting 1.38, derived from a measurement of the triangle pattern, and the 50 per cent retracement level of the most recent downtrend. The next higher target is around 1.48, consisting of the 61.8 per cent Fibonacci retracement of the downtrend. That price level is followed by 1.54, which is where the second swing up off the corrective low of 0.95 matches the price appreciation of the first up swing.

A drop below 1.19 indicates a potential breakdown, or the triangle is evolving into a larger consolidation pattern.

A similar triangle consolidation pattern has formed in the daily chart of Takaful House. An upside breakout is signalled on trade above 0.79, which also puts the stock back above its 55-day ema for the first time since early-May. It would then be heading towards 0.94, followed a resistance range from around 0.96 to 1.00.

Last week Takaful ended higher by 2.65 per cent to close at 0.735. It should break out this week as the apex of the triangle is nearby. A daily close below 0.71 indicates a bearish breakout instead of bullish. This could lead to a test of the most recent swing low at 0.608.

Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at bruce@etf-portfolios.com