Dubai: Last week the Dubai Financial Market General Index (DFMGI) declined by 57.91 or 1.40 per cent to end at 4,088.82. Volume fell to a 16-week low, while market breadth fell to the bearish side, with 31 declining issues and only nine advancing.

The DFMGI managed to drop to a three-week low early in the week, falling below the 55-day exponential moving average (ema) on a couple of days, but each time closing above it. So, even though there was a short-term bearish signal as the index moved below the 55-day ema, the fact that the day ended above it on each of two days, is short-term bullish. In other words, the 55-day ema is showing that it is holding as support for the index, at least so far.

In addition, the 21-day ema has now converged with the 55-day and is sitting just barely above it, for the first time since around August 2012. This is a confirmation of the decline in volatility as the DFMGI continues to consolidate. At the same time, as price action compresses, what follows is frequently an acceleration in movement.

An acceleration to the upside remains the most likely direction so far. Last week the bullish flag pattern in the DFMGI was discussed. This price formation is a trend continuation pattern. It remains well in place given that last week’s activity did not see a daily close below the 55-day.

For the pattern to continue to retain its bullish bias we must next see a rally above and subsequent daily close above 4,196.41, the most recent swing high. Then a rally above the 2015 high of 4,253.28 is needed to confirm a breakout and continuation of the bullish trend that started from the December 2014 low. If that occurs the index would next be targeting approximately 4,385, followed by 4,544, and next a resistance zone from approximately 4,657 to 4,728.

Alternatively, a drop below last week’s low of 3,991.54 is short-term bearish. The index would then be targeting the most recent swing low of 3,912.85 from late-May, with a good chance of correcting still lower. One lower level to watch for support to come in if the May low is exceeded to the downside is the 50 per cent trend retracement price level at 3,743.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) fell 34.04 or 0.72 per cent last week to close at 4,726.72. Volume fell somewhat, while market breadth was split between 21 declining issues and 13 advancing.

After reaching a 2015 peak at 4,896.89 two weeks ago the ADI corrected as much as 4.8 per cent at last week’s low of 4,664.41. A good deal of support was seen there, in the area of prior multi month resistance zone, as the index was able to end the week in the top half of the week’s range. Also, that drop looks to have completed a 61.8 per cent Fibonacci retracement (4,659.56) of the short-term uptrend, measured from the May swing low. Even though not exact it was pretty close.

Combined, these factors point to the possibility that the ADI may have completed its retracement of the 4,896.89 peak, and strength should start coming back into the index. We saw some indication of that on Thursday, as the index was up 29.61 or 0.63 per cent on a pop in volume. Volume for the day was the highest in eight days and the second highest in fifteen trading days.

At the same time, a drop below last week’s low shows selling pressure has not abated. The ADI would then be heading towards potential support zone from around 4,630.55 (21-day ema) to 4,590 (prior weekly resistance).

Further strength at this points has the ADI heading first towards the most recent peak of 4,896.89. Other price areas to watch for potential selling pressure to pick up are 4,947.42 and 49,982.87. Each is where an ABCD pattern or measured move completes. In addition, there is 5,004, which is where resistance was seen as a swing high a couple times in 2014.

Stocks to watch

National Bank of Abu Dhabi (NBAD) has been the ninth worst performing stock this year in the Abu Dhabi market, falling 22.5 per cent. Last week it was up 2.84 per cent to close at 10.85. However, it can now be put on the radar as it may be forming a bottoming formation that could lead to higher prices.

A potential bullish double bottom reversal pattern has been forming and there is a clear buy trigger established on a move above 11.00. That’s the price level that has been a weekly high or low on five of the past 14 weeks, thereby confirming its potential significance if the price is exceeded to the upside. An upside breakout above 11.00 on higher volume could see the stock rise to at least the 38.2 per cent Fibonacci retracement level at 14.44.

Although NBAD has been lagging the wider market, reflecting relative weakness, risk is relatively low at this point compared to the potential minimum upside. A drop below the 2015 low of 10.45 prior to an upside breakout would indicate a bearish move instead of bullish, and if it occurs after a breakout, would indicate a failure of the double bottom pattern.

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