UAE market bullish in short term

Dubai: While the UAE markets were closed for all but one trading day last week due to the Eid holiday, a number of commodities, including oil, gold and copper, and international equity markets, such as the US, London FTSE-100, and the Hong Kong Hang Seng, continued to slide off highs and broke trend lines early in the week before finding support later and bouncing.

The Frankfurt DAX Index and Tokyo Nikkei, however, moved above recent highs. Japan has been lagging major world stock markets while Germany has been leading. This relative strength in these two major markets, while other international markets and commodities sold off, might indicate that the selloff was temporary. So far that seems to be the case as the close of the week in world markets was generally bullish. The expectations change if the lows of last week are broken.

How might this affect the UAE stock markets? If the markets were open for longer last week they might have continued to trend lower through recent retracement lows (minor support).

However, both the Dubai Financial Market General Index (DFMGI) and the Abu Dhabi Securities Exchange General Index (ADI) have hit minor price support several times in the past couple of weeks and have not broken through. We may see the bullish sentiment seen at the end of last week in international markets carryover to the UAE, at least in the very short term (days rather than weeks).

When looking at the bigger picture, the bullish medium term trends in UAE markets are still in place, but now in a corrective mode with only one leg down so far. So, it wouldn't be surprising if the market indexes see further declines in the coming weeks.

Dubai

Last week, the DFMGI dropped 4.65 or 0.27 per cent to close at 1,687. Volume was very low as there was only one trading day before the Eid holiday.

A minor support zone with a low of 1,675.13 was hit several days over the past couple weeks and has held so far. That zone is also just above support of the 200 period exponential moving average (ema), at 1,670.15 last week, and 1,669.37, support from September 23, 2010. Also, the 38.2 per cent Fibonacci retracement level, measured from the mid-August 2010 low, is at 1,667.45.

So, to summarise, we have a larger support zone with multiple potential support levels from 1,675.13 down to 1,667.45. If we break below the higher level of 1,675.13, then there are several levels below where support might be found. A move through the low of the zone, 1,667.45, would indicate more aggressive selling indicating that a deeper correction is likely. Generally, the deeper the correction, the longer the potential recovery.

Holding above the support zone over time will indicate strength and that a clearer resumption of the uptrend is possible. However, momentum is still down and even if we don't break below this zone, we could see a choppy market.

Abu Dhabi

The ADI declined 9.52 or 0.35 per cent to close at 2,748.92, during its one trading day of the week. As would be expected, volume was low.

Momentum indicated by the daily chart continues to be bearish in the ADI however, minor support around 2,739 has been hit several days over the past couple weeks without the index breaking below. A breakthrough 2,739 is the first sign that further downside is likely. If the index stays above that level in the short term then a bounce is possible, although it might be short-lived.

Given the chart pattern of the ADI, it wouldn't be surprising to see it break below this minor price support level.

The next level to watch for support is at 2,702.60, the 38.2 per cent Fibonacci retracement level of the uptrend measured from the late August 2010 low. Next is 2,678.50, where resistance was found previously and now possible support. This is almost exactly where the 200ema is currently, 2,678.49. It deserves extra attention given that two separate pieces of analysis identify almost the exact same level. Keep in mind that the price of the 200ema moves each day as the index progresses.

Short term resistance is at 2,777.58 but is followed closely by the recent high of 2,836.05.

Stocks to watch

Even if the nearby support levels hold in the major indexes there are no clear indications a resumption of the uptrend is imminent. Since most listings in the UAE move in relationship to the market indexes, further profit taking and consolidation is likely. However, there are some stocks to keep an eye on which have shown relative strength during the recent run-up.

One of the stocks in the Dubai market based on recent price action is EmiratesNBD. It has maintained its uptrend during the recent market declines. When the market turns bullish again, this stock could retain its leadership position. Although Dubai Islamic Bank has sold off recently the degree of its correction is normal. Support was found recently around the 200ema three different days, between Dh2.19 and Dh2.20.

Methaq Takaful Insurance's correction has been minor so far with the stock consolidating very close to recent highs. Consolidation close to the high of a trend can indicate underlying strength. A move through the top resistance of Dh3.04 would signal more aggressive buying and a likely resumption of the trend.

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

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