The Dubai Financial Market General Index (DFMGI) was up by 68.82 or 2.51 per cent last week to close at 2,805.22. That’s the strongest performance in 11 weeks. There were 22 advancing issues and 14 declining, while volume dipped to a nine-week low.
Although there is still a way to go, the DFMGI did show some promising early signs of reversing off the bottom. Moreover, support at last month’s low of 2,706.05 has continued to hold. There are now several items to keep an eye on heading into the next one to several weeks.
As noted last week, the DFMGI has formed a potential bullish descending wedge in recent months. A wedge can form as a trend-continuation pattern, or as we see here a trend-reversal pattern. The bullish wedge is a form of consolidation that is downward sloping, while the parameters of the wedge can be identified with trend lines across the top and bottom of the pattern. Both lines are declining and angled towards each other. Upon a breakout of the pattern, the price has a tendency to see a noticeable pick-up in upward momentum.
The first sign of a breakout is on a move above the falling trend line on top of the pattern. Last week’s rise almost triggered a breakout of the pattern but the week ended right around the line instead. Therefore, a daily close above last week’s high will trigger a breakout of the wedge. However, confirmation of a breakout won’t occur until there is a daily close above the prior swing high of 2,854.49 from five weeks ago. The specific price represented by a trend line is difficult to identify with certainty so exceeding a swing high provides greater clarity.
Nevertheless, a breakout above the long-term downtrend line did occur last Thursday and the index closed clearly above that line. This is bullish by itself.
We can also watch the 20-week simple moving average (SMA) trend indicator for signs of further strength as the 20-week has done a good job of identifying dynamic resistance of the downtrend for the past year or so. A daily close above the 20-week around 2,840.75 would signal a breakout of that moving average.
In addition to the above, there is also a double-bottom trend-reversal pattern present in the daily chart of the DFMGI. A breakout of that pattern occurred last week on a move above 2,763.34 and was confirmed on the daily close above the price. Both happened on Wednesday.
The Abu Dhabi Securities Exchange General Index (ADXGI) advanced by 38.41 or 0.79 per cent last week to end at 4,920.67. Market breadth was about even with 17 advancing issues and 16 declining, while volume rose a bit above the prior week.
A breakdown of a double-top trend-reversal pattern was triggered last week as the index fell below 10-week support of 4,869.21. However, price did not keep falling and instead quickly found support at the 20-week SMA and bounced. The low for the week was reached on Tuesday at 4,836.08. Further, the week ended positive, near the high of the week (4,930.15), and back above the prior 10-week support level.
We’ll have to watch carefully what happens next to see what this type of price behaviour might indicate for the future. For last week, the bears initially took charge but quickly lost their position to the bulls. For the short-term, this is bullish market behaviour.
Going forward, the ADI faces a 10-week resistance zone that is around the four-year highs. For a bullish trend-continuation breakout into new highs the index will first have to bust through this consolidation range. This will occur on a daily close above 5,039.83, the peak reached 10 weeks ago.
At the same time, there is risk remaining that the double-top breakdown could follow-through to the downside. However, this won’t be clear unless there is a drop below last week’s low.
If a bullish breakout occurs in the DFMGI while the ADXGI maintains strength, then the ADXGI will have a better chance of confronting resistance and possibly breaking out to the upside. Both behaviours will support the other in improving investor sentiment in the UAE.
Stocks to watch
Arabtec Holding was the leader in Dubai last week, rising 0.17 or 9 per cent to close the week at 2.05. The stock broke out of a double-bottom trend-reversal pattern on Wednesday on a move above 2.01, as weekly volume rose to a 16-week high. Not only was last week’s price action a breakout of a classic bottoming pattern, but also likely a continuation of the second leg up in a larger bullish move that began off the May 1.58 bottom.
There is now a chance that Arabtec is in the early stage of a bullish reversal of the long-term bearish trend that began off the 32.509 peak in May 2014. As much as 95 per cent of the stock’s value was lost during the bear market as of the May low.
A daily close above the June swing high of 2.35 will provide the next sign of strength and give the most significant bullish signal in more than four years.
Bruce Powers, CMT, is a technical analyst and global market strategist.