The potential for the UAE equity markets to continue to rise exists, given the news last week that the US Federal Reserve will maintain its monetary stimulus through its $85-billion-a-month (Dh312 billion) bond buying programme, the bullish reaction in some global equity markets, and encouraging performance in the UAE markets.

Although a longer correction would be constructive for the larger trend, providing a more solid platform for the UAE markets to continue their ascent, the general technical picture is encouraging for the short-term.

The Dubai Financial Market General Index (DFMGI) closed within 3.6 per cent of its most recent peak and above weekly resistance, while the Abu Dhabi Securities Exchange General Index (ADI) ended 4.3 per cent below its most recent peak.

During the correction, each index completed a 38.2 per cent Fibonacci retracement of the uptrend begun from the November/December 2012 lows before buyers returned in force. Such a minimal normal retracement increases the potential potency of a breakout to new highs if it is to occur before another sell-off. Further confirmation of strength is needed if the bullish scenario is to unfold.

Dubai

The DFMGI rallied 127.58 or 5.03 per cent last week to close at 2,666.14. Volume improved to the second highest level of the past 14 weeks, while 28 issues advanced and seven declined. Now in its 20th month, the bull trend has brought the DFMGI 106 per cent above the January 2012 low, and 65.6 per cent higher for the year.

Gains in the DFMGI have put the index above key resistance of 2,622.09, hit in the recent decline. It is now pushing up against the next potential resistance area of 2,674.15.

A daily close above that price level puts the recent peak of 2,761.55 in sight with the prospect for a breakout higher. The next resistance zone of significance would then be from around 2,869.70 up to 3,049, each a prior monthly support or resistance level. Upside momentum has not yet extended, which is supportive of further upside.

Even though technical signs are encouraging, the potential for another sell-off remains. Near-term support is at 2,595.56 down to approximately 2,565.80. A daily close below the lower level will likely lead to a test of weekly support around 2,538.56. If selling persists through that level then a test of the recent swing low of 2,299.80 becomes more likely, along with a greater probability the DFMGI could slide below it.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) gained 92.26 or 2.48 per cent to close at 3,812.09, putting the index back above its 21-day ema, an indicator for trend support and a bullish sign. Volume improved on the move up as it has for the past couple of weeks, and most of the listings participated. There were 27 gainers and 10 decliners for the week. The ADI is now up 66.2 per cent during the past 20 months and is 44.9 per cent higher for the year.

This is the second consecutive week of gains with increasing volume, and it follows a sharp drop to support at 2,299.80, the most recent swing low. The ADI has not yet reached overbought conditions based on momentum. This increases the chance for further upside in the short-term.

Unlike the DFMGI, the ADI has not yet gotten above its next important weekly resistance level, which is at 3,826.84. That’s the next hurdle it needs to cross for further signs of strength, and is followed by the 3,975.74 peak. A daily close above that peak will have the ADI next targeting the 4,198 potential resistance area.

Weekly support is at 3,727,76, last week’s low. If the index retreats below that support level then a test of the 3,456.24 support area, the low from the recent sell-off, is likely. That price level could also be surpassed on the downside.

Stocks to Watch

Leaders (technically strong stocks that have risen above prior swing highs) include Agthia Group, Deyaar Development, National Central Cooling, Union Properties, and Waha Capital. None are currently in safe entry zones but can be watched for potential entries during retracements.

Arabec Holding completed a 61.8 per cent Fibonacci retracement during the recent decline, finding support at 2.07. The subsequent rebound has been 21.3 per cent as of last week’s close at 2.51, a weekly gain of 6.36 per cent. Another bullish indication is that the stock is back above its 21-day ema, after dropping just below the 200 ema during the retracement. If Arabtec can close on a daily basis above the recent peak of 2.69, then the chances are good it will be on its way to reaching and eventually surpassing the 3.115 swing high from the first quarter of 2012.

Volume in Waha Capital surged to a three-year high as the stock broke out of a three-and-a-half month rectangle consolidation pattern, thereby signalling a continuation of the uptrend. The stock closed at 1.05, up 16.67 per cent for the week, and its highest price since October 2008. Waha next targets 1.17, the 38.2 per cent retracement of the long-term downtrend, followed by 1.42. Weekly support is at 0.90.

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