Dubai: Last week the Dubai Financial Market General Index (DFMGI) jumped 111.41 or 3.74 per cent to close at 3,092.89. There were 29 advancing issue and only seven declining, while volume improved to a two-week high.

The high for the week was 3,106.48, right where two trend lines converge, the long-term uptrend line starting from the 2012 low and the downtrend line started from the July-2015 highs, together creating an important resistance area. That high was close to where the DFMGI closed, but still below the prior week’s high of 3,124.69, generating an inside bar or inside week. This is where the high-to-low range of the current week is contained within the range of the prior week. It represents a certain amount of indecision as there was no progress on either the upside or downside of the trend.

If the index can get above the two-week high and stay there it will then be above the two trend lines, a sign of strength, but not enough by itself to clear the road higher. What happens thereafter is of greater significance. Potential resistance of the 200-week simple moving average (sma) is at 3,162.81, followed by the December swing high at 3,188.83. That swing high needs to be exceeded on a daily closing basis before there is an indication that there could be more upside in the foreseeable future. At that point the downtrend price structure would be violated as there would no longer be a series of low swing highs and lower swing lows, the definition of a downtrend. Sign of weakness

If the December peak is exceeded on the upside the DFMGI would then be heading towards the 3,241 price area, followed by 3,301. This doesn’t mean that the index would then go straight up, but it does increase the likelihood that a retracement lower would eventually be followed by another attempt to move higher. Until then we assume that resistance from last week’s high and up to the December high will hold an advance for now.

A drop below last week’s low of 2,978.18 is the first sign of weakness, followed by a decline below the more significant two-week low at 2,963.72. The next support zone below there is around 2,857, followed by the 2,800 area.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) advanced by 141.08 or 3.46 per cent to end at 4,212.88. While most issues participated in the rally, with 25 advancing and 11 declining, volume dropped to a three-week low.

This move puts the index at a new high for the current rally, a seven-week closing high, and it followed a breakout of a daily bullish flag pattern (short downward sloping price channel). Plus, the ADI ended strong, closing almost at the high for the week, which was at 4,213.57. Other signs of short-term strength include a weekly close above both the intermediate-term downtrend line, drawn from the July-2015 highs, and the 21-week exponential moving average (ema). Although the 21-week ema, which is at 4,203.1, was just barely exceeded, this is the first time since the first half of August that the DFMGI has closed above it. These are all signs that bullish sentiment dominates.

Next, a move above last week’s high will have the index heading first towards the 4,240 to 4,274 price zone, followed by the December peak at 4,313.78. Unless that peak is exceeded on a daily closing basis we can anticipate that sellers will again dominate and push the index lower for an eventual test of the December lows, with a lower border at 3,713.56.

Support is at last week’s low of 4,044.58, with a drop below there likely leading to a drop to 3,954, followed by 3,916.

Stocks to watch

There are at least two bullish inverse head and shoulders patterns that have been forming and can be watched a breakout. One is in the Dubai Financial Market, and the other in Al Salam Bank. An inverse head and shoulders pattern will show up at the end of a downtrend and requires an upside breakout trigger before it is valid.

For the Dubai Financial Market a breakout is triggered on a decisive rally above 1.23, preferably accompanied by a noticeable increase in volume. At that point the stock would also be well above its 55-day ema for the first time since July of last year. Based on the pattern alone the minimum target would be approximately 1.47.

A bullish breakout will occur in Al Salam Bank on a move above 0.905. This would also put the stock back above its 200-week ema for the first time since early-August, providing an additional sign of strength. As of now the 200-week ema is resistance at the breakout price level. When two analysis factors, in this case the moving average along with the top of the head and shoulders pattern, are at the same price resistance, the potential for a pickup in momentum on a breakout increases. The target for Al Salam is around 1.03 if a breakout occurs.

 

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