UAE markets hit support, which could hold for a decent bounce

Last week, the Dubai Financial Market General Index (DFMGI) dropped by 234.35 or 6.32 per cent to close at 3,473.42, its worst performance in 14 weeks. Most issues participated in the decline, with 35 falling and only two advancing, while volume dropped slightly from the previous week, hitting the second lowest level of the past 23 weeks. To date, the decline off the February 15 peak of 3,984.78 has been 15.3 per cent.

The index was down as much as nine per cent for the week before finding support at 3,374.37 on Wednesday, and rallying into Thursday’s close on higher volume. That low is in a support zone represented by the swing low of 3,357.96 where support was seen on January 6. Its potential significance increased as the 61.8 per cent Fibonacci retracement completed at 3,380.58. Also, at the low the relative strength index (RSI) — a measure of momentum — was at its most oversold position since mid-December. In other words, there are a few technical reasons that the DFMGI may get a bounce from here.

A rally above Thursday’s high of 3,486.97 is the first sign of strength, with a move above 3,555.08 providing further confidence. However, the DFMGI then starts heading up into a resistance zone starting from around 3,628, and up to 3,008.

Last week’s high is within the zone at 3,710. A daily close above that level will given another short-term bullish signal, with the index again close to another potential resistance zone, represented by a combination of the downtrend line and the 55-day exponential moving average (ema). The 55-day ema is an indicator for the intermediate-term trend, and it is now at 3,803.70.

Last week’s low combined with the early-January swing low, creates a support zone from 3,374.37 to 3,357.96. A drop below last week’s low improves the chance for a further drop. At that point the DFMGI would be testing the corrective low of 2,992.53, which ended a 42.4 per cent decline from the late-August 2014 peak. However, if the index does drop below the lower part of the support zone, there is a good chance support would be found in the area of the 200-day ema, which is now at 3,204.35.

The Abu Dhabi Securities Exchange General Index (ADI) declined by 145.91 or 3.25 per cent last week, ending at 4,337.63, for its worst performance in 14 weeks. Volume fell just slightly from the previous week, reaching a three-week low, while market breadth was bearish, with 32 declining issues and only five advancing. So far, the index has corrected 9.6 per cent from its recent peak of 4,703.58 hit three weeks ago.

By Wednesday, the ADI was down 4.9 per cent for the week at its low of 4,252.18, before rallying into Friday on three-day high volume. This makes sense as the ADI was oversold at that point based on the 14-day RSI and had been falling for 10 days. Plus, it had reached the prior swing low support at 4,295.57 from early January, which was also the target for a bearish wedge pattern (discussed in recent weeks). In addition, a 50 per cent retracement (4,290) of the prior rally was completed.

Although there was a daily close below the January low, a bearish signal, the index quickly recovered to close above that level on Thursday. In addition, Thursday’s low of 4,282.87 was higher than Wednesday’s low, and the high of the day exceeded Wednesday’s high as well.

A daily close above last week’s high will give the next short-term bullish signal. After that watch for resistance around 4,454.50, followed by last week’s high of 4,498. The 55-day ema is now at 4,562, and a prior support zone could see resistance starting around 4,613.

On the downside, a daily close below week’s low points to a test of the December corrective low of 3,876.44. Higher levels to watch for support are the 61.8 per cent Fibonacci retracement of rally starting from the December 2014 lows, which is at 4,192.41, followed by the 200-day ema at 3,957.38.

Stocks to watch

Given last week’s volatility, there are not many good chart patterns right now, so we’ll take a quick look at a couple of stocks that are showing relative strength. The first is Al Madina for Finance and Investment, which was discussed last week. It remains a leader in Dubai, closing higher for the week by 4.24 per cent at 0.418. Whether the wider market strengthens this week, the stock remains poised to move higher. A prime target would be 0.476/0.48, consisting of a target from a measured move and the 55-day ema, respectively.

Arkan Building Materials was the top performer in Abu Dhabi, closing up 13.08 per cent at 1.21, an eight week high, with volume at a 29-week high. The stock has now closed above its long-term downtrend line for the first time since it started to fall from the peak reached a year ago. These are signs of a change in trend, from bear to bull. The first resistance zone starts from 1.46, and up to 1.62.

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