Dubai: Last week the Dubai Financial Market General Index (DFMGI) was up 14.28 or 0.43 per cent to close at 3,324.07. That’s the highest weekly close in five weeks and it’s accompanied by very strong volume, the highest level since early-March. This is the type of relative volume one would like to see as the market comes off a bottom. It increases the likelihood that the two-week low of 3,195.49 will hold for a while and lead to a tradable rally. Barely 50 per cent of listings participated in last week’s strength though as 20 advanced and 19 declined.
In the bigger picture, the chart of the DFMGI has been forming a large rectangle consolidation pattern over the past six months or so. The two peaks from this year, 3,604.70 and 3,623.70, form that top resistance zone of the pattern, and 3,197.32 to 3,195.49 the support zone. Two weeks ago the lower price level of the support zone was identified as the index attempted to break below that price level over three days and failed.
Subsequently, a sharp short-term rally followed before resistance was seen at last week’s high of 3,368.06. That high was a four-week high and at resistance of the five-week high of 3,368.30. Given this, last week’s action should be the beginning of a reversal of the prior 12-week downtrend as we’ve closed above prior weekly peaks and we now have a higher weekly high and higher weekly low, the fundamental definition of an uptrend.
Nevertheless, the market may not go straight up. Even though the high of last week was bullish relative to prior weeks, by the end of the week the index closed relatively weak, just barely above the 50 per cent level of the high to low range for the week. Following the 3,197.32 swing low hit in May the DFMGI went through six week’s of choppy sideways action before heading much higher. We could see that same thing happen again.
At the same time, also be prepared for a more immediate continuation of strength. The first sign of this will be on a break above and subsequent daily close above the five-week high of 3,368.30. If this occurs a bullish trend continuation signal will be issued with the DFMGI next targeting a resistance zone starting from around 3,428 to 3,474 (eight-week high). That begins a consolidation zone going up to the top of the rectangle at 3,623.70.
Near-term support is at last week’s low of 3,275.16, followed by the two-week low of 3,195.49.
The Abu Dhabi Securities Exchange General Index (ADI) fell by 19.04 or 0.44 per cent last week to end at 4,2973.04. Volume remained high, the second highest level since late-February, while market breadth leant on the bearish side with 20 declining issues and 13 advancing.
This is now the fifth week in a row that the weekly open to close range has been less than half a per cent, and it has occurred with price levels that are close together. Even though the high to low range for the past six weeks is much larger, the tight open to close range is a sign of price compression as supply and demand stays relatively equal. Energy is building during this time period in preparation for a potentially explosive move. High volatility will generally follow low volatility.
Even though the ADI has held above 4,174.71 support from May, with a test two weeks ago as the index hit new support at 4,179.13, it remains in a downtrend until we break above certain price levels. Regardless, the odds continue to favour a bounce from here as support of the past six weeks is right at the 200-week exponential moving average (ema), which is now at 4,225.59.
Strength will next be indicated on a daily close above the two-week high of 4,316.76, and then on a move above the three-week high at 4,349.91. Above there is a resistance zone starting around 4,458, and going up to approximately 4,517.50.
Stocks to watch
Union National Bank broke out of a four-month descending trend channel two-weeks ago on high volume before hitting a peak of 4.58. Last week it pulled back to test support of the channel, which came in at the week’s low of 4.14. That occurred last Sunday and over the subsequent four days the stock rallied to end the week up 0.45 per cent at 4.48. This is the second week in a row that Union National has closed just above its 55-week ema, which is another bullish sign.
The formation of the descending trend channel that began in July provided a healthy rest for the stock following an aggressive 37.6 per cent five-week rally that started in June. Price action of the past two weeks suggests the stock may be in the early stage of another aggressive move as a follow on to the first let up from June.
The next sign of strength is on a move above last week’s high of 4.51, followed by a daily close above the two-week high. Greater significance will be given to a move above the 4.58 peak as that will confirm a continuation of the uptrend that began from the January low of 3.31.
Bruce Powers, CMT, is chief technical analyst at www.MarketsToday.net. He is based in Dubai.