Dubai: The Dubai Financial Market General Index (DFMGI) gained 82.85 or 2.04 per cent last week to end at 4,146.73, its best performance in eight weeks. There were 25 advancing issues and 13 decliners, while volume fell to a four-week low.

For the past eight weeks the DFMGI has stayed within a relatively narrow range between a high of 4,253.28 and a low of 3,912.85. Rough support has been maintained around the 55-week exponential moving average (ema), now at 4,033.51, with the index closing above it for all but one of the past 11 weeks, a relatively bullish sign. In addition, the 200-day ema is being recognised by the index. Last week’s low of 4,039.38 was right at support of the 200-day ema.

Given last week’s price action, the pattern developing in the DFMGI is looking more like a breakout of a bullish flag pattern, that needs further confirmation to show some potential for upside follow-through. A bullish flag pattern forms in a pullback or correction that follows a rally. Symmetry is indicated as a declining parallel channel is formed during the correction. The breakout of this flag pattern occurred three weeks ago, but the breakout was quickly hit by selling pressure, putting the bullish potential of the pattern in doubt.

Although largely attributed to etisalat’s removal of a ban on foreign ownership of its shares, last week’s rally in the Abu Dhabi market also triggered a breakout of a flag pattern. In this case a clear breakout occurred as the ADI reached a high for 2015. Regardless of why it happened, it happened, and therefore the bullish sentiment could move to Dubai in the coming week or two, especially given the similarity in bullish chart patterns.

At this point, a decisive rally above the 2015 high of 4,253.28 is needed in the DFMGI to confirm a breakout of the flag. Any decline before then should ideally hold above last week’s low or at least the 55-day ema, now at 4,030. A drop below 4,030 puts the bullish nature of the pattern at risk of failure. The low or support of the flag pattern is at 3,912.85.

If bullish confirmation is seen on a rally above 4,253.28, then next watch for resistance around 4,385, followed by approximately 4,544, and then a range from around 4,657 to 4,728. The potential for a higher target is also there as the approximate target based on the flag pattern is 4,807.74, 16 per cent above last week’s close and almost a perfect match with swing low support from September 2014, which was at 4,807.50.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) surged by 188.74 or 4.13 per cent to end at 4,760.76, its strongest weekly performance since May 2014. At the week’s high of 4,896.89, the index was up 7.1 per cent. Volume improved over the prior week, while market breadth leant on the bullish side, with 17 advancing issues and 13 declining.

As noted above, the ADI broke out of a bullish flag pattern last week, rising with conviction above the prior 2015 peak of 4,723.42, and closing above that level on a weekly basis. The breakout also confirmed a continuation of the uptrend, begun from the December 2015 low, and put the ADI well above its 200-day ema for the first time since November 2014. Previous advances above the 200-day ema since April were short lived as selling quickly pushed the index back below the moving average.

There are some higher price targets that indicate the ADI may still have more to go on the upside, however, they are all within a consolidation range denoting potential resistance from the topping activity that occurred from April to November of last year. In addition, the Relative Strength Indicator (RSI), a measure of momentum, reached the most overbought level since April 2014, just before it peaked.

The first potential target would be a test of last week’s high. This is followed by the completion of a short-term measured move at 4,947.42, and then the completion of a long-term measured move at 4,982.87. Still higher is 5,004, which was a peak twice in 2014.

Stocks to watch

Air Arabia has been consolidating in a relatively narrow range not far below its 2015 peak of 1.76 for the past several weeks. Resistance at 1.69 has been identified over four days during this period pointing to a clear price level that can be used to signal a breakout. A decisive daily close above 1.69 is needed to confirm a breakout. Decisive, meaning momentum should noticeably pick up, along with volume. Last week the stock closed down 1.2 per cent at 1.65.

The first target would be the 2015 high, followed by a potential resistance zone from 1.79 to 1.88. This is where support or resistance was seen multiple times on a weekly basis in 2007 and 2008.

The above bullish scenario becomes less likely in the near-term if Air Arabia falls below three-week support of 1.63.

 

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