Dubai: After a very volatile week, the Dubai Financial Market General Index (DFMGI) ended lower by 61.39 or 1.65 per cent, closing at 3,648.45. That relatively small drop followed a decline of 12.8 per cent for the week as of Tuesday’s low at 3,241.35. Buyers came in at that point, which is in the same area where price support was seen back at the swing low in late-March (3,232.79), and right around the 78.6 per cent Fibonacci (3,262.33) retracement of the intermediate uptrend starting from the December swing low.

From the April peak of 4,253.28, the DFMGI has corrected 23.8 per cent (20 per cent down is typically considered a bear market). There were 27 issues that fell and 10 that advanced, while volume spiked to an 11-week high.

Last week’s decline triggered a breakdown of a large bearish flag pattern (below approximately 3,600) that has been forming all year. The flag is a counter-trend rally where the retracement higher can be identified with two upward sloping parallel lines, one denoting resistance across the top of the pattern, and the other support across the bottom. As the index dropped decisively below the lower line last week, a bearish signal was triggered. This was also the first sign that the downtrend begun from the 2014 peak may be continuing.

As with all chart patterns, they can fail and give false signals or evolve into new patterns. We need to watch carefully what happens next for some clues. Since last week’s decline that triggered the flag was the end of an approximately 11-day pretty consistent decline (part of a larger five-week descent), which put the DFMGI into very oversold territory, we can expect that the relief rally that followed has more upside to go. And, in the worst case, a choppy period, as the five-week downtrend seems to have exhausted itself for now.

A move above Thursday’s high of 3,672.73 provides the next sign of strength, but given the volatility over the past two weeks, a break above should be watched with caution if some backing and filling doesn’t happen first. Weekly resistance (last week’s high) is at 3,704.07. Up around 3,912.85 would be where the index starts to hit the lower part of a potential resistance zone, and up to the two-week high of 3,985.40.

The next support zone below last week’s low starts from around 2,992.53 (December 2014 low) to 2,952.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) ended lower by 51.39 or 1.14 per cent to close at 4,461.09. At the week’s low of 4,069.11, the index was 17 per cent off its 2015 peak of 4,902.09, and down 9.8 per cent for the week. There were 27 declining issues and seven advancing. Volume rose to a seven-week high.

Two weeks ago a breakdown of an ascending bearish wedge chart pattern was triggered. Last week’s price action clearly confirmed the bearish nature of that pattern. As discussed last week there is a smaller wedge within a larger wedge, depending on where the bottom line of the pattern is started. Typically the minimum target from a wedge pattern is the beginning of the formation. The target from the smaller wedge was 4,252.18 (March low), and it was clearly exceeded to the downside last week. As for the larger wedge pattern, the minimum target is 3,876.44 (December 2014 low), and has not yet been reached.

Given previous price consolidation from mid-2013, the December low can be looked at as a potential support zone that starts around 3,976 and goes down to approximately 3,883. But the closest support zone from last week’s close starts around 4,306 and goes down to 4,252.

If strength is able to be maintained, a rally up to the two-week high of 4,496.89 is possible. First however, the ADI needs to close above last week’s high of 4,512.48. If last week’s high is exceeded, the index heads up into a large consolidation zone up to the two-week high, and strong resistance might be seen at any point.

Stocks to watch

Methaq Takaful blasted up and out of a multi-month sideways bottom six weeks ago, rising to 1.35 before hitting resistance that led to a pullback. The rally put Methaq decisively above its 200-day exponential moving average (ema) for the first time since April 2014. Last week the pullback continued with the stock dropping as low as 0.80 before rallying and closing at 0.94, down 6.93 per cent for the week, but again above its 200-day ema. Overall this is normal behaviour after and upside breakout. Technically, Methaq is showing relative strength when compared to many other listings. Support is at last week’s low with the next target starting around 1.03, followed by 1.15, and then the most recent peak of 1.35. Retracements towards 0.80 can be used to find a lower price for entry where the risk to reward is better. If the stock drops below 0.80, then the underlying strength seen in recent price behaviour becomes suspect.

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