Last week the Dubai Financial Market General Index (DFMGI) bounced 16.87 or 1.06 per cent to close at 1,601.39. Advancing issues of 22 led declining of seven, while volume improved to the second highest level in nine weeks, including a couple holiday weeks.
For the past seven weeks the DFMGI hasn’t moved much as it’s stayed within a narrow range between resistance at 1,630.96 and support at 1,575.28. A daily close above the top of this range will give the index a chance of reaching the recent high of 1,656.20, and possibly exceeding it. If this occurs the next areas for potential resistance are around 1,706.60, followed by 1,778.25.
So far the retracement off the 1,656.20 high has been relatively minor, only 4.9 per cent, or a little more than 33 per cent of the six-month uptrend begun from the early-June low of 1,425.34. And, the index remains above support of its 200 daily exponential moving average (ema). These are signs that underlying buying strength remains. Whether it will be enough to propel the index higher from here remains to be seen.
Last week we began a discussion about the potential bearish head and shoulders trend reversal pattern that has formed in the chart of the DFMGI over the past three months. In order to be a valid reversal pattern a daily close below support at 1,575.28, needs to occur. The pattern consists of a peak (1,656.20), with a lower peak both before and after that high. A daily close above the seven-week range mentioned above would invalidate the pattern.
Based on the structure of the head and shoulder pattern we can estimate the potential decline if it does trigger. Targets determined from chart patterns are not always reached but they do give us some idea of a potential move. In this case the target would be approximately 1,490.40, which matches with 1,492.30, where support was found back in July, and would put the DFMGI again below its 200ema on the daily chart.
Abu Dhabi
The Abu Dhabi Securities Exchange General Index (ADI) stayed in a very narrow range last week, closing 7.48 or 0.29 per cent higher at 2,619.65. This after bouncing off support of its 200ema and long-term uptrend line the prior week. The uncertainty in the price range was confirmed by market breadth with advancing and declining issues almost equal at 15 and 16, respectively. As might be expected with such low volatility, volume declined from the prior week.
The 200ema, now at 2,579.45, is support for 11-month uptrend which began in mid-January. As long as the index stays above that support area the uptrend remains in place. In the short-term a higher bounce may be seen up into resistance from 2,636.53 up to 2,694.06. A daily close above the higher level is needed before there are signs that the retracement may be over and the uptrend is ready to continue. More likely is the scenario where resistance is hit and the ADI turns back down. This of course is only if the ADI bounces higher from here.
If the ADI falls below the 200ema then the target from a bearish ascending wedge chart formation around 2,550.93 is that more likely to be reached. A downside breakout from the wedge was triggered five weeks ago. Since then the index has been proceeding in classic bearish fashion. Two uptrend lines outline the wedge, one across the top and one along the bottom, with the lines angled towards each other and would therefore eventually cross.
The 38.2 per cent Fibonacci retracement level of the 11-month uptrend is at 2,549.49. A minimum retracement of a trend to at least the 38.2 per cent level is very common. This increases the odds that a drop below the 200ema could eventually reach the wedge target area, at a minimum.
Alternatively, the ADI could be range bound for a while above its uptrend line and 200ema, but below recent highs.
Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at bruce@etf-portfolios.com