Dubai: The Dubai Financial Market General Index (DFMGI) gained 302.62 or 7.09 per cent last week to close at 4,573.05, its strongest performance in fifteen weeks. Volume remained relatively high, reaching its second highest level of the past thirteen weeks. Most issues participated in the advance, with 27 ending higher and seven declining.

A correction of 18.5 per cent (swing high to low) ended two weeks ago at 4,231.12, right in the area of the 55-week exponential moving average (ema). The 55-week ema, now at 4,225.13, is being used to identify dynamic support of the long-term uptrend, begun from the January 2012 lows, similar to a trend line. The prior correction of 31 per cent, which ended in June, also found support at the 55-week ema. Therefore, the low from two week’s ago is the second time in recent months that support for the trend was found near this moving average, thereby confirming its significance.

In addition, the DFMGI quickly rallied back above its 200-day ema (discussed in last week’s column), another measure of support for the long-term trend, and a positive so far for the short-term outlook. During the 18.5 per cent correction the index closed below the 200-day ema for several days.

Given the trend pattern for the DFMGI, the low from two weeks ago, along with the 55-week ema identifies the more significant support area. This means that a decisive drop below 4,225 is a clear medium to long-term bearish signal, as the odds that selling will intensify increases at that point. The next support zone would then be from around 3,869.34 to 3,730.91. A drop below the lower price level triggers a continuation of a multi-month downtrend, and would be the first time the DFMGI has fallen below its 55-week ema since July 2012, a clear change in pattern.

Given last week’s rally, a large symmetrical triangle consolidation pattern has formed in the chart of the DFMGI, as an ascending trend line can now be drawn along the bottom of the pattern. A descending line already exists across the top of the pattern. The two lines are converging towards each other and cross at the apex. If this pattern continues to form, relative volatility will decline over the next couple of months, until the index breaks out of the pattern, either on the upside or downside. The downside trigger is identified in the paragraph above.

While an upside breakout is confirmed above 5,193, a bullish breakout is first indicated a little lower, on a move above the downward sloping trend line that identifies dynamic resistance. The actual price represented by that line will depend on when the index might reach it, if it does.

Given the triangle pattern the DFMGI is likely to move higher over the coming weeks as the pattern continues to form. In the near-term, the next potential resistance zones are around 4,709, then 4,807, followed by 4,231.

Abu Dhabi

Last week the Abu Dhabi Securities Exchange General Index (ADI) advanced by 61.68 or 1.29 per cent to close at 4,829.83. Volume fell below the prior week’s level, while there were 26 advancing issues against 13 declining.

Early in the week the ADI fell below that prior week’s low of 4,715.25, before finding support at 4,688.36 and bouncing into Friday. If that low holds, then it marks a 10.5 per cent correction off the prior peak of 5,241. The bounce puts the ADI back above its 200-day ema after closing below it for four days, a relatively fast recovery.

Last week’s low, along with the 55-week ema (now at 4,664.88), marks the most significant support zone for the ADI. A drop below that zone will likely lead to increased downside momentum, with the index first targeting 4,452.83, the corrective low from June. If that low is broken the ADI moves into a downtrend.

If there is additional strength this week, taking the index above last week’s high of 4,862.08, then there will also be a symmetrical triangle consolidation formed for the ADI. A continuation of last week’s bounce towards the top of the consolidation pattern can then be anticipated. The next more significant resistance looks like it starts around 5,055, and then up to the top descending line around 5,182.

Stocks to watch

Emirates NBD was up 7.67 per cent last week, ending at 9.69. What is interesting is that volume surged to the second highest level since the stock went public. Many times a significant increase in volume can be a precursor to a breakout in price.

During the recent decline a couple of weeks ago the stock found support at 8.70, essentially at its 200-day ema. This is relatively stronger behaviour than many issues currently, which remain below their 200-day averages. Last week’s gain put Emirates NBD back into the middle of a 12-week consolidation pattern, formed just below the most recent peak of 10.45 from May. It is now just a little more than 7 per cent away from that high. Another gain like last week and the stock will be breaking out of a six-month basing period, with its next target starting around 11.10.

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