Volumes indicate upwards trend

Dubai: Healthy bullish price behaviour was seen again last week in both UAE markets with each triggering a completion of the previous multi-month downtrends.

Dubai

The Dubai Financial Market General Index (DFMGI) had been up as much as 3.8 per cent for the week by Thursday, before closing lower that day. Regardless, performance for the week was still decent with the DFMGI appreciating 30.14 or 2.14 per cent to close at 1,435.96.

Volume was supportive of the bullish move as it was the highest since April 2011. Increasing volume in a rising market supports the idea that demand for shares is increasing.

Therefore, after a pullback lower or sideways consolidation, demand can increase once again to support another leg up. Market breadth was also positive with 21 advancing issues and 10 declining.

The DFMGI has now completed the second week of a rally having risen 11.0 per cent off the 1,294.10 low from three weeks ago, as of the close. Important resistance had been at 1,426.28, a previous price swing peak of the downtrend.

That resistance was clearly broken last week, with the index closing above it. This provides that first confirmation that the medium-term downtrend has ended.

It's important to note that the long-term trend in the DFMGI remains down. Previous rallies over the past two years have lasted from four to eight weeks, before the market turned back down again to continue the larger downtrend.

Last week, resistance was found in a price area identified by several indicators, including previous support (now resistance) from both July 2010 and December 2009, the general price area represented by the 200 daily exponential moving average (ema), an indicator for the long-term trend, and the 50ema on the weekly chart. Together, this represents a significant potential resistance price area. At the same time, this also means that a move above weekly resistance at 1,459.73 gives another bullish signal.

Several possibilities now exist.

Either the market continues higher from here in the near future, has a brief "sideways" rest first and then continues higher, pulls back lower first to some degree, or moves into a medium-term relatively sideways pattern staying below the high of last week (1,459.74).

If the DFMGI does get above last week's high watch for the next resistance level around 1,493, followed by the 1,519 price area.

This higher level is approximately trend line resistance of the downtrend begun from the November 2010 high.

This current rally is a retracement of the previous eight-month downtrend. We can therefore anticipate a maximum price for this current rally to be around 1,540.

The 61.8 per cent Fibonacci trend retracement level of the downtrend begun from the April 2011 high is at 1,539.78.

Fibonacci analysis is a mathematical ratio based on the prior trend that identifies potential resistance areas.

Once a trend retraces up to 61.8 per cent of the prior trend (in this case the eight-month downtrend), the countertrend rally has a good chance of being complete.

Weekly support is around 1,394.50, followed by support around 1,357.

Abu Dhabi

Last week, the Abu Dhabi Securities Exchange General Index (ADI) had its strongest performance in almost two years. The ADI strengthened by 86.46 or 3.62 per cent to close at 2,476.62. Volume improved over the previous six weeks giving credence to the rally. Also, market breadth was bullish with 32 advancing versus 11 declining issues.

In addition to the strong performance, the ADI signalled a completion of the previous six-month downtrend. Both the downtrend line and 50ema on the daily chart (not shown in chart) have been cleared. Further, the index cleared the 2,417 resistance area, which was needed for confirmation of trend completion. The 2,417 level is a previous swing peak used to identify the price structure of the downtrend. Based on the close the ADI was 7.9 per cent above the recent low of 2,294.34. If the ADI continues to surge in the near-term, watch for a resistance zone from around 2,516 to 2,536. A combination of several indicators identify that price zone, including previous support (now resistance) at 2,523.

On a pullback lower, support is around 2,417, with a more significant price level at weekly support of 2,394.74.

As mentioned a number of times over the previous months, the ADI broke down from a multi-year symmetrical triangle price pattern, which is bearish, back around September 2011. A symmetrical triangle can be outlined with two converging trend lines, one across the top slanted down, and one across the bottom slanted up.

The first leg down looks to now be over with a swing back rally in place towards resistance at the bottom of the triangle formation. If the 2,536 resistance level is broken then the ADI could get close to 2,593 resistance, which would put it almost at the very bottom of the triangle pattern at that point in time.

Stocks to watch

A number of listings have extended their gains thereby increasing the risk of a pull-back lower in the short-term, particularly the big movers. Some less extended stocks that can be watched as they look to have additional upside potential include Air Arabia, Drake and Scull, Du, Abu Dhabi National Energy Company, and Union National Bank.

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

Disclaimer: Stock market investments are risky and past performance does not guarantee future results. Gulf News does not accept any liability for the results of any action taken on the basis of the above information.