Dubai: The Dubai Financial Market General Index (DFMGI) fell by 36.97 or 1.05 per cent last week to end at 3,482.25, while market breadth was bearish, with 26 declining issues and only 7 advancing.
Even with the one-day trading week a pattern in the DFMGI is becoming clearer. First discussed last week, there is a potential head and shoulders topping pattern that can best be seen in the daily chart of the index. This a classic trend reversal pattern, which in this case is related to the three-month uptrend coming off the June low. Also supporting the potential for further weakness is a break below the eight-month uptrend line that occurred last week.
Last week’s decline further clarified the right shoulder of the pattern (failure of short-term eight-day rally), with the week’s low of 3,458.82 testing support of the neckline. The neckline is a trend line drawn across support of the head and shoulders topping consolidation pattern. Once it is broken to the downside a trigger is given and the pattern confirmed. At that point the odds improve that the decline will reach a minimum measuring objective defined by subtracting the price distance from the recent 3,623.70 peak hit four weeks ago to the neckline, and then subtracting the same from the neckline breakdown price. The bearish trigger will be given on a decisive drop below the neckline at 3,441.90. Once that occurs, and if it occurs, the minimum target derived from the pattern is 3,255.71.
This particular head and shoulders pattern is contained within a larger developing rectangle consolidation pattern that has been forming over the past four months. The bottom of the pattern and therefore important support is around 3,197.32.
A breakout above the two-week high of 3,556.52 would negate the above bearish scenario and likely lead to further upside. The next barrier to exceed would then be a resistance zone from approximately 3,623.70 (second peak of 2016) to 3,604.70 (first peak of 2016).
Regardless of the above analysis the intermediate-term outlook remains bullish given the relationship of price with two key trend indicators; the long-term downtrend line, and longer-term moving averages. In June the DFMGI broke out above the long-term downtrend line and subsequently continued higher. Now, it looks to be in the process of retracing back to that line to test it as support, which could easily end up around converging around the same area as support of the rectangle pattern.
Last week the Abu Dhabi Securities Exchange General Index (ADI) dropped by 17.12 or 0.38 per cent to close at 4,499.26. There were six advancing issues and eleven declining.
The key pattern to watch in the ADI is a developing bullish descending wedge. This formation is a trend continuation pattern once it’s confirmed by an upside breakout. It takes the form of a declining consolidation range. Given the structure of this particular wedge it could easily continue to develop if the ADI moves lower over the coming weeks. Further supporting an eventual resolution to the upside is that fact that the pattern has formed around support of the long-term downtrend line (ADI went above it in early-July) and support of the 55-week exponential moving average, which is now at 4,439.
At this point a breakout will first be indicated on a move above the two-week high of 4,524.41 with the ADI then targeting the recent peak around 4,621.50. A continuation above that peak will trigger a bullish trend continuation signal, with the 2016 high of 4,637.24 the next barrier to exceed for further signs of strength.
Stocks to watch
Methaq Takaful Insurance has been trending higher in well constructed price patterns ever since hitting a bottom in January at 0.44. First there was a steady two-month rally of 54.2 per cent at the mid-March peak of 0.96 before the stock moved into a correction. The correction formed a symmetrical triangle trend continuation pattern before resolving itself to the upside with a two-day 19 per cent pop to a new 2016 high of 0.99 in mid-July. Subsequently, Methaq moved into another correction and has formed a second but smaller symmetrical triangle pattern. At this point the triangle is getting within days of either breaking out to the upside, failing due to a decline, or evolving into a larger pattern.
Last week support at the lower part of the triangle was tested with a 0.86 low. So far that support has held. If, however, that low is broken to the downside then selling pressure will likely intensify, at least short-term.
Of course the preferred route would be for price to breakout to the upside. This would occur on a move above 0.92, with strength confirmed on a daily close above 0.96. Final confirmation would be on a move above the 2016 high of 0.99. With an upside breakout Methaq would first be heading towards the initial objective derived from measuring the triangle pattern, which would be 1.07, followed by approximately 1.14, which is where an adjusted measured move completes.
Bruce Powers, CMT, is chief technical analyst at www.MarketsToday.net. He is based in Dubai.