There’s a bullish consolidation pattern setup in the Abu Dhabi market and a potential bearish pattern in the Dubai market. This reflects a higher than normal degree of uncertainty among investors as to what might be coming next. It’s possible each of these patterns could eventually trigger. It all depends on the timing of a pattern breakout relative to each other.

Dubai

The Dubai Financial Market General Index (DFMGI) dropped by 39.19 or 1.12 per cent last week to close at 3,474.38. There were 28 declining issues and only six that advanced, while volume increased above the prior week.

Last week the index continued to consolidate and further evolve a potential head and shoulders trend reversal pattern. This topping pattern has developed following a rally that ended at the 3,623.70 peak reached six weeks ago (2016 high) and has formed right around support of the 200-day exponential moving average (ema). The low of the pattern is at 3,430.15 and the 200-day ema is now at 3,432.23.

A decisive drop below 3,430.15 therefore will trigger both a bearish breakdown of the pattern and the long-term moving average trend indicator. The breakdown is confirmed on a daily close below that price level. Based on the pattern structure the target for the index would then be at least 3,255.71. That target can be combined with a price support zone from support seen earlier in the year down to the May swing low at 3,197.

Downside risk from the head and shoulders pattern will remain unless there is a daily close above the 3,556.52 swing high from three weeks ago, referred to as the right shoulder of the pattern. If that occurs then the bearish nature of the pattern subsides and the odds for an eventual upside breakout above the 2016 high improves. The first target above the 2016 high is approximately 3,740, resistance from October last year.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) fell by 38.85 or 0.86 per cent to end at 4,476.32. There were 15 advancing issues and 20 declining, while volume increased to the second highest level of the past nine weeks.

The ADI remains in a descending consolidation pattern identified as a bullish wedge. This pattern has a tendency to breakout to the upside with strong momentum and an increase in volume. The high and beginning of the pattern is at 4,621.50 reached nine weeks ago. Since this pattern develops as price declines a lower decline from what we’ve seen so far could occur while the pattern still retains its bullish potential. This could go on for as long as another four to six weeks, but not likely longer than that.

So far the low or support of the wedge is at 4,442.79, which matches support of the 200-day ema at 4,440.13. A decline below support will not necessarily lead to a pickup in momentum given the characteristics of the wedge so far, slow decline and low volatility (tight range).

A bullish breakout will occur in the near-term on a decisive rally above the four-week high of 4,524.41. With that the first target would be 4,621.50, followed by the high of the wedge pattern around 4,621. Slightly higher still is the 2016 high resistance at 4,637.24.

Stocks to watch

Takaful Emarat has been consolidating for the past nine weeks or so following an explosive breakout of a one-year base in July. The stock gained as much as 78 per cent in five days following the breakout before finding resistance at 3.59, the 2016 high. It then retraced into a bullish trend continuation pennant pattern, where it currently resides. The pennant has been forming on support of the 55-day ema, which is bullish, while volatility shrinks over time. Low volatility leads to high volatility.

A pennant chart pattern takes the form of a relatively small symmetrical triangle consolidation pattern following an unusually sharp rally, referred to as the pole. If the current pattern is the final formation before a breakout then a bullish signal is given on a decisive move above 2.96. That would signal the beginning of a new rally of the overall uptrend and a continuation of the initial breakout and trend continuation signal from July.

If the current structure of the pattern is the final a breakout should occur within the next two weeks. As with all patterns they can always evolve into a different pattern. A decline below 2.64 indicates that the consolidation phase will likely continue for a while longer and a lower retracement could also occur.

Based on a measure of the pennant Takaful Emarat has the potential to eventually rise to 4.49 following a breakout. That’s the minimum target from this pattern. However, targets are not always reached and this should be kept in mind. In this case the percentage move once again would be relatively large. Nevertheless, a strong move up following a breakout is indicated.

Takaful is a market leader this year with a 59.55 per cent gain year-to-date, making it the fifth strongest performing stock in the Dubai market. Last week the stock was down 1.05 per cent to close at 2.84.

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