Dubai: Last week, the Dubai Financial Market General Index (DFMGI) dropped by 78.08 or 2.14 per cent to end at 3,470.37, the sixth consecutive week of declines. Most issues ended lower, with 28 declining and only seven advancing, while volume fell noticeably from the prior week of very high volatility.

Resistance last week was at 3,762.85, just around where support was seen on the first sell-off coming off the 2014 peak (3,730.91), and at the 50 per cent retracement area of the most recent leg down. That resistance zone is now an important price area to watch as a rise above it will increase the likelihood of a continuation of the short-term uptrend begun two weeks ago. If that occurs then next watch for resistance starting around 3,912.85 and up to approximately 3,985.40. The higher price area is weekly resistance and it sits in the lower part of a four-month consolidation phase that creates a potential resistance zone all the way up to 4,253.28.

Even with a further bounce into the 3,913 price area there will remain concern over the large bearish flag pattern that triggered two weeks ago. This is a classic trend continuation formation of the downtrend that began off the 2014 peak. Last week’s price action was a classic test of the trend line zone as resistance (previously support before bearish trigger, which occurred as the DFMGI dropped below and closed below the uptrend line on a daily basis). The characteristics of the flag point to continued downward pressure over the coming weeks and months. If the pattern reaches its classic objective then we’re looking at a potential of the DFMGI eventually reaching at least 2,828, which is a conservative measurement.

In the short-term a drop below last week’s low of 3,509.08 signals a continuation lower. However, given the general chart pattern and the fact that the index has been declining each of the past six weeks, downside momentum will probably weaken for a while, with the index either chopping around a bit or making an attempt to continue higher up into the resistance areas mentioned above. If not, then watch for lower support around 3,385 to 3,358, followed by the recent spike low at 3,241.35.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) dropped by 82.95 or 1.86 per cent last week to end at 4,378.14, its fourth consecutive week of lower prices. Market breadth was bearish with 20 declining issues and 10 advancing, while volume dipped below the previous week’s level.

Resistance was met last week at 4,541.33, right in the area of previous support and near the lower part of a potential resistance zone that goes up to around 4,609. The next higher area to watch for resistance starts around 4,664, followed by the 4,789 price area.

There’s been one rally to date since the ADI found support at 4,069.11 two weeks ago during the accelerated sell-off seemingly triggered by increasing problems in China’s economy and markets. As discussed in previous weeks the larger impact on the ADI is coming from a large bearish wedge pattern that triggered several weeks ago. Possibly the two week low was the completion of the wedge target, however, there is also a possibility it was not completed. On a classic measure the target was around 3,876.44, but targets are the least reliable component of using chart patterns.

The bounce to date is a classic pullback into resistance (prior support of the lower ascending trend line at the bottom lower edge of the wedge). This would indicate that there is a reasonable possibility that the ADI will move higher to counter the rapid decline from two weeks ago, before turning back down again with momentum.

Stocks to watch

Abu Dhabi Shipbuilding was the top performer last week, rising 0.34 or 11.22 per cent to close at 3.37. Since reaching a low of 1.30 in March of this year the stock has been trending higher, reaching a peak of 4.00 four weeks ago. Even during the extreme sell-off in the wider market two weeks ago there was no key support level exceeded to the downside and Abu Dhabi Shipbuilding maintained its uptrend price structure. Last week it continued to do so as it pulled back to touch support of the uptrend line. Eleven weeks ago the 21-week exponential moving average crossed above the longer-term 200-week ema, a further bullish sign for the intermediate trend.

While a daily close above the most recent peak of 4.00 is needed to give a trend continuation signal, the next sign of strength is on an advance above last week’s high of 3.55. At the same time near-term support is at last week’s low of 2.80. A decisive break above 4.00 will see the stock next target the 2014 peak of 5.33.

Given the significant volatility seen two weeks ago in the market indices, the relative performance of Abu Dhabi Shipbuilding has been very promising, assuming signs of strength are given within the next to several weeks.

Bruce Powers, CMT, is president of WideVision and chief technical analyst at www.MarketsToday.net. He is based in Dubai.