UAE markets continue strong start to the year

The UAE markets seem to like the first quarter of the year. Last year a strong rally started in mid-January, with the Dubai Financial Market General Index (DFMGI) rising 37.4 per cent and the Abu Dhabi Securities Exchange General Index (ADI) gaining 15.2 per cent, before each index began to reverse in March. The first two weeks of 2013 have seen relatively strong upside moves so far, with volume picking up significantly. Positive performance accompanied by high historical volume reflects renewed interest from investors and supports a bullish outlook.

Dubai

Last week the DFMGI had another big move, rising 74.47 or 4.43 per cent and slightly surpassing the prior week’s advance of 4.40 per cent. The DFMGI closed at 1,756.22 on big volume and near the high of the range for the week. Volume reached its highest level since early-March 2012, and the index had its third highest volume week in at least three years! This is very bullish behavior on both price and volume and reflects real strength coming into the market. It’s a very positive sign for the medium-term outlook. At the same time market breadth was again widespread with 23 advancing issues and only eight declining.

The key resistance area to watch now is from 1,778.25 up to 1,793.10, consisting of the peak from March 2012 and the peak from November 2010, respectively. Since both those swing highs are so close together in price, they should be looked at as a potential zone of resistance. A daily close above the higher level will be the first clear sign that the DFMGI is beginning to reverse its long-term downtrend, and therefore improves the long-term outlook. The bottoming process has been going on for almost four years, ever since the February 2009 low was reached following a significant decline due to the financial crisis.

The near-term uptrend started from the 1,425.34 low in June 2012. It is considered to be the second leg up of a larger uptrend that is still forming, begun from the 1,294.10 low of January 2012. When having a second leg up in an uptrend it is very common it at least match the distance traveled in the first leg, if not exceed it. This is refered to as a measured move in technical analysis. The advance in the first leg was 484.15. By adding that distance to the beginning of the second leg we get a potential target, based on this analysis, of 1,909.44 or 8.7 per cent above last week’s close.

As the trend progresses higher, if it does, intermittent profit taking leading to a retracement or consolidation phase will likely occur. At this point one can argue that the DFMGI is extended to the upside, and that the risk of a pullback or rest (consolidation) of some degree is there. Weekly support is at 1,681.75, with a drop below that level likely to see further downside in the short-term. 1,656.20 would be the next level to watch, followed by the 1,600 area.

Abu Dhabi

The ADI advanced by 42.28 or 1.57 per cent last week to close at 2,728.27. Not quite as significant a move as in the DFMGI, but positive nonetheless. Volume is an important indicator here as well as it reached its highest level since October 2009! There were 28 advancing issues and 14 declining.

Unlike the DFMGI, the ADI had already breached the prior 2012 peak earlier in October 2012. It did this for the first time since the drop from the 2005 highs began. That move confirmed the structure of an uptrend and indicated a potential long-term trend reversal, from a downtrend to an uptrend. Last week’s action again confirmed the bullish outlook with another trend continuation signal as the ADI closed above the prior top of the trend at 2,707.67, and at an 18-month high.

The next resistance area of signficance based on prior price action is around 2,777.21, the peak from June 2011. If we determine a measured move as we did with the DFMGI, where the first leg up of the mid-January bottom matches the second leg up from the June 2012 low, we arrive at a target of 2,769.65. This is very close to the peak just mentioned and therefore we can anticipate a potential resistance zone from approximately 2,769.65 to 2,777. The ADI can certainly surpass that level but the odds favor a retracement around that zone, if not before. Weekly support is now at 2,685.99, followed by 2,620.66.

Bruce Powers, CMT, is a financial consultant, trader and educator based in Dubai, he can be reached at bruce@etf-portfolios.com