The bull market continues in UAE markets

Dubai: Another strong week for the Dubai Financial Market General Index (DFMGI) with a gain of 104.52 or 2.98 per cent, ending at 3,609.18. This is now the ninth consecutive week of positive performance with eight of those week’s hitting a new five-year high, including last week. For each week the index ended strong, closing at or near the high of the weekly range. In other words, there is a consistent pattern of strength indicated in the weekly chart. An indication of a change in the pattern will be a sign that a correction could be coming. Volume was strong and improved over the prior week, while most issues participated in the advance with 25 advancing and only five declining.

As discussed in prior weeks the current advance is now heading into the tenth week. On the basis of time the index is at risk of stalling soon. Of course, there is always a chance buying strength continues to propel the index higher in the near term, but the odds don’t favour it. At this point the risk of a decline of some degree is higher than the chance for a continued advance. Prior consistent advances over the past couple of years have not lasted more than 10 weeks. The next potential resistance zone starts at approximately 3,624.67 and goes up to around 4,060.

What we don’t know is what form a correction will take. It could be short and shallow, like three out of four that have occurred over the past year, or more significant. Risk management is how to handle the uncertainty of what might happen in the future.

Support is at 3,504.66, last week’s low, followed by 3,371.70, then 3,278.91.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) advanced 103.68 or 2.35 per cent to close at 4,521.47, a new five-year high. Volume surged to the second highest level of the past five years. The maximum volume week during that period was several weeks ago. Most issues participated in the advance, with 34 advancing and 10 declining.

The next target for the ADI is around 4,553 to 4,570. Not much above the current price level. That is where there was a multi month support zone from back in early-2008. Frequently, areas of prior support become resistance zones in the future. That potential exists in this case, especially since support in that zone held for several months.

Just below that price zone the ADI completed a 78.6 per cent Fibonacci retracement last week, at 4,510.45. Fibonacci ratio analysis is used to calculate where a higher probability resistance zone might show up relative to the prior trend. In this case the prior trend is the downtrend that starts from the June 2008 peak. Since the retracement level is very close to the potential resistance zone, it provides another clue indicating that the ADI may see resistance starting soon.

The last time the ADI hit a key Fibonacci resistance zone of note was in August 2013. A 13.1 per cent correction followed, which lasted around three weeks. That Fibonacci retracement level was approximately 61.8 per cent of the prior long-term downtrend.

Last week’s low at 4,421.07 is near-term support, followed by the prior week’s low at 4,356.24. Since the nine-week uptrend is structured as a sequence of higher weekly highs and higher weekly lows, a drop below a week’s low would be a clear change in structure and therefore a loud clue that momentum is starting to change. As always, this could lead to a relatively sideways consolidation period or a pullback of some degree. Until then the trend continues to point higher. Watch carefully how the ADI reacts if it hits the potential resistance zone mentioned above for clues as to whether buying strength is enough to keep the trend moving higher in the near-term.

Stocks to watch

It is now prudent for investors to start taking a defensive stance, lowering risk by postponing new entries until a retracement occurs, or trading less aggressively. This will provide for an opportunity to accumulate at lower prices. There is not much in the market right now that provides good risk versus reward as most of the stronger stocks are extended.

Du and etisalat, which were mentioned last week as consolidating within bullish ascending triangle patterns, remain in consolidation. Keep an eye on them for a breakout of consolidation.

Aldar Properties gives a good idea of what the potential of a breakout is from a well formed bullish trend continuation consolidation pattern. Aldar broke out to the upside from a symmetrical triangle pattern a month ago. Not much happened for a few weeks until last week when the stock took off. Aldar advanced 16.07 per cent to close at 3.25, its highest price since April 2010. Volume surged to a five-year high. Investors will be watching Aldar to buy on weakness. Based on the triangle pattern the next target for the stock is around 3.54. That’s followed by a prior resistance zone starting at 4.82.

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