There are signs of increasing investor caution developing in the charts of the UAE markets. Add to that further weakness in U.S. equities, including Apple Computer, along with economically sensitive commodities like oil and copper and the bullish outlook for equities globally begins to fade. Key support and resistance levels can tell us which way the trend may go.
The Dubai Financial Market General Index (DFMGI) dropped by 5.73 or 0.35 per cent last week to close at 1,617.47. Market breadth leaned to the bearish side with 18 declining issues and nine advancing, while volume was up only slightly from the prior shortened trading week.
For the past 22 weeks the DFMGI has continued to progress higher in an ascending parallel trend channel. This week a third uptrend line has been added to the chart between the two parallel lines. The new line connects the lows of three prior retracements and is approximately where the DFMGI found support Thursday (1,593.90) and bounced. Moreover, that low was in the area of resistance for August, now support.
Last week’s low is now important short-term support. On the way up from the early-June bottom of 1,425.34 the DFMGI experienced four retracement periods prior to the current one. The maximum retracement of those four was 3.9 per cent. Thursday’s low was 3.8 per cent below the most recent high of 1,656.20, almost an exact match. Therefore, a decline to below that level will be change the retracement pattern and give an early warning sign that further weakening is likely.
The next area which looks to have some significant support would then be around 1,559.57 to 1,556.60. That lower level is currently the 200 daily exponential moving average (ema). A test of the 200ema as support seems likely if last week’s low is breached.
A daily close above weekly resistance of 1,624.74 will give the next bullish signal increasing the probability that the short-term downtrend is over. The recent high of 1,656.20 would still need to be surpassed to confirm a continuation of the uptrend, with the DFMGI then targeting the next area of potential resistance from around 1,702.73 to 1,706.60.
The Abu Dhabi Securities Exchange General Index (ADI) was flat last week rising by only 0.95 or 0.04 per cent to close at 2,674.39. Although it did manage to barely exceed the prior week’s high of 2,676.51 on a couple days, the index ended below that level. The high for last week was 2,680.49.
What’s notable is that even though volume improved to the second highest level in 34 weeks, and the index moved to a new trend high, it was unable to hold the advance and closed relatively weak. That indecision is also seen in market breadth as advancing and declining issues were equal with 15 each.
These are signs that upward momentum is dying, which could lead to a more pronounced decline than what’s been exhibited so far during the uptrend. Further, the ADI on the weekly chart is the most overbought since October 2009, based on the Relative Strength Index or RSI. The RSI is a momentum oscillator that measures the speed and change of price. Although a market can remain overbought and still continue higher, what eventually follows is a decline.
So far, there is no confirmation of weakening however. That will first occur on a decline below weekly support of 2,655.72, last week’s low, and more importatly on a daily close below that level. Potential support levels are then around 2,635.71, 2,596.95, and 2,550.93. Each represents a low of a prior retracement over the past 23 weeks. The lower level is more important as a break below it would put the ADI below the longer uptrend line starting from the low in January. That line is one indication of support of the 11-month uptrend. In addition to the uptrend line and 2,550.93, the 200ema on the daily chart should be watched closely for support. It is currently at 2,557.40.
Further, since the early-June low of 2,420.07, when the 23-week uptrend began, the maximum retracement has been 2.8 per cent. If last week’s high of 2,680.49 is the high for now, then a 2.8 per cent fall would put the ADI at 2,605.44.
A decisive rally above last week’s high will have the ADI next targeting the 2,690.37 to 2,699.43 resistance area.
Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at email@example.com
Stocks to Watch
Etisalat has been consolidating in a tightening range for almost two months. It is sitting above support of a two-year downtrend line and above its 200ema. An upside breakout occurs above Dh9.86. Near-term support is at Dh9.67, followed by Dh9.47.
A similar chart pattern exists for Abu Dhabi National Energy Company with resistance at Dh1.34, followed by Dh1.36, and support at Dh1.27. The next direction will be signaled by which price level is broken next.
Arabtec has been pushing up against resistance of its 200ema for the past five weeks and unable to break higher. Given that it has been in a downtrend since the April high more aggressive selling could be seen soon.