Both UAE markets are holding strong in an area of prior resistance. Even though there could be further upside in the short-term, this is also an area where the chance for a pullback lower has increased. Watch for signs of weakening or strengthening, relative to key support and resistance levels, for an indication of the next direction.
Last week the Dubai Financial Market General Index (DFMGI) improved by 17.38 or 0.98 per cent to close at 1,792.30. Volume was lower than the prior couple of weeks. But this is to be expected given the four-day trading week.
A daily close below last week’s low of 1,770.40 would indicate weakening, which could lead to further declines. Other potential price areas to watch for support include 1,726.22, 1,681.75, and 1,656.20.
Upside momentum has been slowing for the past couple of weeks. This is a warning sign that the odds for a retracement, or at least a sideways consolidation resting phase, is closer than it has been recently. However, it doesn’t always happen right away and some additional upside is still possible.
If you look at a weekly chart (not shown here) you will notice that the range of each of the past four weeks has been narrowing as the DFMGI rises. In addition, using the same chart, the index has reached the second most overbought level in at least four years when looking at the Relative Strength Index (RSI). It is also overbought on the daily chart. The RSI is an oscillator used to identify changes in momentum or rate of change.
Further, market breadth is telling us to be cautious as declining issues beat advancing at 19 to 12, respectively. This is a change in the trend in market breadth relative to the prior three weeks when it has been bullish with more advancing than declining issues.
So far the resistance zone around the 1,793.10 swing high from November 2010 is holding the advance. Last week’s high in the DFMGI was at 1,804.73. But notice that the close for the week was below that prior resistance level. Regardless, if the index can continue higher from here the next zone of resistance is up to 1,887.21, the peak from March 2010.
A daily close below last week’s low of 1,770.40 would indicate weakening, which could lead to further declines. Other potential price areas to watch for support include 1,726.22, 1,681.75, and 1,656.20, with the lower level being potentially the most significant.
The Abu Dhabi Securities Exchange General Index (ADI) rose 17.18 or 0.62 per cent last week to close at 2,783.00. Like we discussed with the DFMGI there are also signs of momentum slowing in the ADI; the weekly range has been narrowing as the index rises, RSI is overbought on both the weekly and daily charts, and the index is sitting up against a potential resistance zone (2,777.21 from June 2011 peak). But unlike in Dubai market breadth remained on the bullish side with 21 advancing and 16 declining issues. And even with the shorter trade week volume was higher than the prior week.
The next resistance zone above current levels is around 2,836.05. That is where resistance was found back in October 2010 and there is a good chance it will be seen there again. If the ADI can continue higher from there then the next resistance zone will be around 2,944.45. A move above last week’s high of 2,798.86 will signal short-term strengthening.
On the downside, last week’s low of 2,754.03 is near-term support. A daily close below that level will indicate an increased likelihood of further downside. Other weekly support areas include 2,729.39, followed by 2,686.
Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at email@example.com
Stocks to watch
Be careful with the telecoms, Etisalat and Du. Each stock had a significant sell-off in December 2012 after an announcement on a new royalty scheme.
Du has since been forming a bearish flag pattern on its chart with support at Dh3.42. The first sign of a bearish breakdown from the pattern is on a move below weekly support of Dh3.52. Typically, a breakout of a flag has the potential to move a similar amount as the first move down. That decline in December 2012 was approximately Dh0.46 or 11.9 per cent. A similar drop below Dh3.52 would put Du down at around Dh3.06, 13.6 per cent below last week’s close of Dh3.54. Alternatively, a rally above Dh3.65 would be a sign of further short-term strengthening.
In the case of Etisalat, the stock dropped Dh1.44 or 14.4 per cent in December following the royalty news before finding support at Dh8.56. It has since rallied, reaching Dh9.59 last week. That rally completed a 61.8 per cent Fibonacci retracement of the prior decline off the November 2012 high of $10.20.
A retracement to the 61.8 per cent Fibonacci ratio is commonly a maximum before a continuation of the prior trend occurs, in this case down. There has only been one leg down so far off the November 2012 peak. A second leg down would not be unusual. If the second leg matches the first (-Dh1.64) Etisalat could drop to approximately Dh7.95.