Dubai: The Dubai Financial Market General Index (DFMGI) dropped by 47.1 or 1.67 per cent last week to close at 2,778.76, the largest decline in 13 weeks. Market breadth was also bearish with 27 issues declining against 11 advancing. Volume fell to a 10-week low. Nevertheless, price action of the past few weeks remains constructive with the near-term outlook optimistic.
Two weeks ago, the DFMGI broke out of a bullish descending wedge pattern before finding resistance at 2,834.29 last Sunday, a six-week high. A pullback followed leading to a test of support at the top trend line outlining the wedge formation and the completion of a 61.8 per cent Fibonacci retracement at 2,755.36. Previously, that line represented resistance of the wedge. Last week’s low was at 2,753.04.
The point of highlighting these characteristics of price action is that together they reflect a classic shift from bearish to bullish behaviour. It is what we would want to see to provide further clarity that the DFMGI may be switching its dominant bearish sentiment as it has been falling for the past 15 months. The market is providing clues as to what might be coming next as the potential upside following the wedge breakout has only just begun.
Frequently, following a breakout through resistance, price will retrace to see if previous resistance has switched to support. Once that process is complete the market is ready to continue to follow-through on the breakout.
Fortunately, in the short-term, the DFMGI has provided additional features that can be used to provide signals of further strength. A long legged doji one-day candlestick pattern formed at last week’s low on Wednesday. A breakout above that day’s high of 2,780.94 can be used to see short-term strength. Following that, a breakout above last week’s high signals a continuation of the developing uptrend begun off the multi-year low of 2,706.57 reached three weeks ago.
Once a daily close occurs above the three-week high the DFMGI has a real shot at improving upside momentum. However, the real bullish trigger comes on a decisive move above the three-month high of 2,854.49.
Due to the positioning of the descending wedge at the bottom of a downtrend, it is a trend reversal pattern. Alternatively, a similar wedge pattern can form within an uptrend and signify a trend continuation pattern. The classic minimum target for a wedge is the beginning of the pattern. For the DFMGI, that would be around 3,109.
Last week the Abu Dhabi Securities Exchange General Index (ADI) advanced for the third straight week, rising 26.71 or 0.53 per cent to end at 5,055.46. There were 15 advancing issues and 22 declining, while volume improved to a four-week high.
The big news is that the ADI broke out to a new trend high and closed strong, at the highest weekly closing price since early-October 2014. It is now within striking distance of contesting the next resistance zone in the area of the May 2014 high of 5,255.35. That’s now only 4.0 per cent away. A daily close above that high will signal a new trend continuation of the larger uptrend coming up off the 2009 low. Last week’s breakout triggers a continuation of the long-term uptrend that starts from the January 2016 low.
Whether upside momentum will be strong enough to break through the 2014 high quickly or slowly remains to be seen. At the same time, resistance might be seen again, which could be strong enough to reverse the current advance for some period of time.
So far, over the past 12 weeks or so the ADI has been able to sustain strength as it consolidated within a relatively narrow range at the top of the trend. A breakdown from the consolidation pattern occurred several weeks ago but it quickly failed, reversing higher to where we are today.
The next key target for the index is around 5,216. That’s where a measured move completes. A measured move is where the second leg up in an uptrend matches the price distance travelled in the first leg up. It reflects symmetry between swings within a trend. The first leg up began off the January 2016 low, and the second leg started at the December 2017 low.
Stocks to watch
Abu Dhabi Islamic Bank was the second best performer in the Abu Dhabi market last week, rising 0.39 or 10.66 per cent to close at 4.05. Weekly volume jumped to a 30-month high on the advance as the stock ended at its highest weekly closing price since April 2016. These are bullish signs.
In the short-term the stock is extended but in the bigger picture it has broken out of a multi-year sideways bottom. Last week’s breakout points to further upside for Abu Dhabi Islamic over the coming months and therefore investors can watch for entry setups during weakness. Last week’s low and support was at 3.65.
The next target upside target is around the 4.558 spike high from April 2016, followed by the 4.904 swing high area from July 2015. If we see the completion of a measured move, starting from the first leg up in January 2016, the stock could hit 4.98.
Bruce Powers, CMT, is a technical analyst and global market strategist.