Dubai

Last week the Dubai Financial Market General Index (DFMGI) advanced by 176.89 or 4.19 per cent to close at 4399.64, its first positive performance in four weeks. The majority of stocks participated in the rally with 23 issues advancing and 10 declining. During the prior three weeks that the index declined volume remained relatively flat, but last week it surged to a 20-week high. This is a bullish indication for the near-term as to the potential for upside follow through.

There is now reason to believe that the correction (-31 per cent, peak to trough) in the DFMGI may be over, at least for the near future. Support was found last week on Tuesday at 3,730.91, with the index dropping below both the 200-day exponential moving average (ema), a long-term trend indicator, and the previously identified support zone with a low of 3,853.16, on that day. But it quickly recovered within the day, on strong volume, ending back above the 200ema, for a one-day reversal of the downtrend. Buyers continued to push the index higher thereafter.

Since August 2012 the DFMGI has remained above its 200-day ema. Last week was the first time it was tested as support since December 2012. Overall, we can say that the 200-day ema held as support, since there was only a quick dip below it and a rapid recovery. The 200-day ema is now at 3,995.

Sustainable bottoms don’t always occur with a quick reversal. Therefore, a test of the low and the 200-day ema is possible and can be anticipated. It may not occur, but investors should not be surprised if it does. A daily close below 3,730.91 will have the DFMGI heading towards its next lower support area around 3,491.

Given the damage that has been done during the decline, the above analysis does not mean that the DFMGI is likely to continue to rally into new highs in the near future. A prolonged period of consolidation is more likely, and it would be healthy for the long-term trend. At the same time the DFMGI remains one of the best equity markets globally for 2014, up 30.56 per cent, behind only Argentina and Ukraine.

Weekly resistance starts at last week’s high of 4,51.62, and is followed by 4,636.55, then 4,836.86. A daily close above 5,191.50 is needed before there is any sign that the long-term uptrend may be getting ready to continue, with a daily close above the 5,406.62 peak needed for confirmation.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) gained 105.97 or 2.27 per cent last week to close at 4,770.74, the first positive week in five. Market breadth was bullish with 24 advancing issues against 13 declining, while volume reached a four-week high.

For 2014, the ADI is up 11.2 per cent. As of last week’s low of 4,455.36, it has completed a 15.2 per cent correction off the 5,253.41 peak reached five weeks ago.

As seen in the DFMGI, the ADI also dropped below its 200-day ema on Tuesday, but quickly recovered to end the day back above the moving average and above the prior lows from the previous week. Support for the week was at 4,455.36. This was a successful test of the 200-day ema as support, the first time since December 2012. It highlights the importance of the 200-day ema as potential support going forward. If there is a daily close below last week’s low, the outlook for the ADI gets that much more bearish. The 200-day ema is now at 4,540.

Stocks to watch

There are a couple of stocks that held up relatively well during the market correction, a sign of underlying strength.

The first is Dubai Islamic Bank. From its peak of 8.32, hit eight weeks ago, the stock declined 38.6 per cent to 6.00. It ended up 5.37 per cent last week at 7.06, in the top half of its weekly range. Of note is that it is one of the few listings that closed above the prior week’s high, and it did not drop below the prior week’s low. Also, last week’s high of 7.35 exceeded the high from two weeks ago.

Another positive, is that during the correction the stock did not dip below a key support zone from around 6.27 down to 5.59. That remains an important support zone, with a drop below 6.00 indicating that additional weakness is likely. Next, watch for a daily close above last week’s high for signs of additional strength.

National Bank of Ras Al-Khaima ended the week at 8.90, up 4.71 per cent, the highest weekly close in 10 weeks, and the high for the week. Its correction began before the ADI and completed seven weeks ago. It is now sitting near the top range of an 18-week consolidation pattern, only 4.2 per cent from the most recent peak of 9.29.

An upside breakout occurs above the peak, with a daily close above it confirming a continuation of the uptrend. Further weakness is likely if the stock first drops below 8.15 support.

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