Dubai: The Dubai Financial Market General Index (DFMGI) dropped by 30.81 or 0.75 per cent last week to close at 4,072.68, its second consecutive week of declines. Market breadth leaned on the bearish side, with 20 declining issues and 15 advancing, while volume fell to a six-week low.

Although there was a short lived dip below the prior week’s low last week, the index quickly recovered to end the week at around the fifty per cent level of the week’s range. This is indicative of overall short-term buyer support. The current near-term support zone is from approximately 4,008.38 to 4,031.69, and consists of a combination of weekly lows over the past month, prior resistance from December 2014, plus the 55-week exponential moving average (ema), now at 4,023.73, and the 200-day ema at 4,031.69.

If the DFMGI gets below last week’s low then it could next find support around the 55-day ema, which is now at 3,933.83. That potential support area is followed by the 38.2 per cent Fibonacci retracement level at 3,863.45, then the 50 per cent retracement zone at 3,743.

At this point there is analysis that could support either a scenario where last week’s low completes a two-week pullback, with the index then proceeding higher from there (analysis above), or a deeper decline into one of the lower support areas just discussed.

In financial markets, once price breaks through a key resistance zone and continues to advance, at some point it will reverse back towards the zone to test it as support. The degree of reversal or pullback from a peak can vary based on the dynamics between underlying support from buyers and resistance from sellers. The decline over the past two weeks is currently testing previous resistance that occurred from late-December 2014 through February, as the rallied above it five weeks ago.

What has not yet been tested is the downtrend line that begins from the September 2014 peak. The DFMGI broke above that line in early-April and accelerated higher. Given that the advance from the March low of 3,232.79 to the April peak of 4,253.28 was 31.6 per cent, a relatively significant move for an index within less than two months, a more aggressive decline down to one of the lower support areas would not be unlikely.

The chance of that occurring within the foreseeable future diminishes if the DFMGI can reach a daily close above 4,154.26, last week’s high. However, a bullish continuation of the seven-week uptrend does not occur until there is a rally above the most recent peak of 4,253.28.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) advanced by 75.11 or 1.65 per cent to close at 4,629.99. Market breadth was about even, with 16 issues gaining and 19 declining, while volume dropped to a seven-week low.

The ADI managed to hold above support of 4,535, the swing low hit two weeks ago, with the low for last week being 4,544.91. That two-week low completed a 38.2 per Fibonacci retracement of the prior upswing from March swing low. Last week’s advance put the index back above its 55-day ema, but it closed right up against resistance of the 200-day ema (now at 4,633.92).

A daily close above last week’s high of 4,640.71 provides the next sign that the ADI is getting stronger, with a daily close above the most recent peak of 4,723.42 needed to signal a continuation of the eight-week uptrend. The index would then be heading towards potential resistance around 4,790.

If the ADI drops below the two-week low, next watch for support around the 50 per cent trend retracement price level of 4,487.80, followed by previous support around 4,454.50, and then the 61.8 per cent Fibonacci retracement level at 4,432.19.

Stocks to watch

Gulf General Investments was the leader in the Dubai market last week, rising 0.109 or 11.71 per cent to close at 1.04, on slightly higher volume. The majority of that advance occurred on Thursday when the stock gained 9.4 per cent, with volume reaching a 15-day high.

Last week’s low of 0.905 completed a 24.6 per cent correction (from recent 1.20 peak), was at support of the 200-day ema, completed a 50 per cent retracement of the prior advance from the March lows, and was in a support zone indicated by the prior resistance peak from February. The relationship of price to the 200-day ema is an example of previous resistance being tested as support, as discussed early in this article.

The three-week pullback in Gulf General has formed a bullish flag pattern on its chart, and last week’s rally could be the early signs of a breakout from that pattern. The next hurdle to cross, to show that last week’s rally has additional upside potential, is on a daily close above the two-week high of 1.06, with further confirmation on a move above the most recent 1.20 peak.

The first target would then be around 1.28, the 127 per cent extension of 24.6 per cent correction, which is 23 per cent above last week’s close.

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