Dubai: The Dubai Financial Market General Index (DFMGI) was essentially flat last week, up only 7.45 or 0.21 per cent to close at 3,519.22. Market breadth was split with 19 advancing issues and 18 declining, while volume rose to a 20-week high.

The index remained contained within an eight-week consolidation range last week and provided little additional information as to what is likely to happen next. Last week’s high exceeded the prior week’s high but that did not lead to further upside as the week ended in the lower quarter of the week’s range. Resistance of the range is at 3,623.70, which is the high for 2016, while support is at 3,430.15.

On the bullish side the DFMGI continues to hold at support of the uptrend line that starts from the 2016 lows, and the lower area of the range is at support of the 55-week exponential moving average (ema). The current eight-week stretch that the index has held above support of the 55-week ema is the longest in a year. In regards to the trend line, if the DFMGI heads higher from current levels it will continue to represent support, but if there is a drop below last week’s low of 3,508.86 the trend line will be broken to the downside. However, the key support zone is from approximately 3,459 (55-week ema) to the low of the range at 3,430.15.

Larger pattern

When looking at the details of the eight-week range within a daily chart a potential bearish head and shoulder top pattern is revealed. Last week’s swing high of 3,556.52 created the right shoulder. As with all chart patterns a trigger needs to occur before the pattern is valid. In this case that would happen on a drop below the low of the eight-week range. Until then the pattern can evolve into a larger pattern, or breakout to the upside.

An upside breakout above 3,623.70 would be a significant bullish signal as it would put the DFMGI at a new 2016 high, trigger a continuation of the uptrend off the January lows, and put the index further above the long-term downtrend line. Together, these signals would provide additional confirmation that the downtrend that began from the 2014 highs has ended and that the uptrend that began early this year can be sustained.

The potential head and shoulders top or eight-week range is contained within a larger rectangle pattern that has been forming since late-April. If a bearish trigger is given on the head and shoulders pattern there is a relatively large zone of support down to the low of the rectangle at 3,197.32.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) was up by 35.73 or 0.80 per cent to end at 4,516.38. There were 16 advancing issues and 15 declining, while volume was slightly below the previous week.

The ADI has been in a slow descent ever since hitting a swing high or peak at 4,621.50 seven weeks ago. That’s close to the 2016 high from April at 4,637.24. Together those two peaks create a resistance range and a significant barrier to a continuation of the uptrend that started from the January lows. At the same time a breakout to a new 2016 high would be very bullish.

The current six-week decline has been on low momentum indicating that it is just a normal correction with some profit taking. There are no signs of significant selling occurring and we can therefore anticipate an eventual resolution to the upside. Further, the decline has now taken the shape of a bullish descending wedge pattern.

A bullish wedge is a downward sloping trend continuation consolidation pattern defined by two descending trend lines that will eventually intersect. One goes across the top of the decline for resistance and the other along the bottom. Breakouts from wedge patterns are frequently decisive and can occur with strong momentum and higher volume.

A move above 4,543.42 would signal a breakout at this time, with confirmation of strength above

4,583.36. But it also wouldn’t be surprising for the pattern to continue to develop over the coming several weeks, which could include further weakness.

Stocks to watch

Shuaa Capital broke out of a multi-month symmetrical triangle consolidation pattern last Monday on five-month high volume. The breakout occurred on a move above 0.675 and was confirmed as Shuaa broke above the previous 2016 peak and top of the triangle at 0.731. Shuaa closed strong, up 21.66 per cent for the week at 0.82, and near the high for the week of 0.83.

This is classic bullish behaviour for a strong uptrend and last week’s price action is likely just the beginning of a new sustained move. Support of the triangle occurred in the area of the 55-week ema and the shorter term 21-week ema crossed above the 55-week as the pattern was being formed. Shuaa had been below its 55-week ema since September 2014, until moving above it in late-March. Each is a sign that strength in the underlying uptrend is building. Therefore, we can anticipate further upside eventually, particularly given the 139.7 per cent 12-week rally that occurred before the triangle pattern. However, the stock is now extended in the short-term but deserves to be watched for potential entries during pull backs.

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