Dubai: Last week the Dubai Financial Market General Index (DFMGI) fell by 116.79 or 4 per cent to end at 2,803.32.
This was the largest one-week drop since November of last year and it occurred as the index fell to new trend lows, although only slightly so far.
The weekly closing price was the lowest since mid-January 2016, which was when the DFMGI bottomed, ending a 16-month decline. There were 10 advancing issues and 25 declining, while volume dipped to a three-week low.
Even though the 2,795.96 low for the week was just barely a new trend low, as the prior trend low was 2,805.44, a bearish trend continuation signal was generated.
The fact that the week’s low was also below that low supports this conclusion. At the same time the week ended weak, just shy of the week’s low. These elements all point to further downside for the Dubai market.
Nevertheless, Thurday’s 0.52 per cent decline ended nine consecutive days in a row of falling prices, and there is a bullish divergence on the 14-week Relative Strength Index (RSI) momentum oscillator.
Nine days in a row of lower prices is unusual and therefore we are much closer to at least a temporary bottom to the short-term downtrend.
And, a bullish divergence in the long-term weekly RSI tells us that downward momentum (rate of change of price) is not as weak or sustainable towards the downside as the price action may indicate.
Then, we have a potential bottoming pattern that is forming and would complete around 2,756.23. The bullish pattern is called a ‘three drives to a bottom’ pattern.
Pattern structure details can be found online but to summarise, the pattern has three successive bottoms or lower lows that are relatively close together in time before a reversal occurs.
The first two bottoms happened recently at the 2,870.07 swing low in May and 2,805.44 swing low in June.
It’s also possible that the pattern completion could come on an extension of a prior swing to around 2,693.63.
The first target area is a 127.2 per cent Fibonacci extention of a prior upswing and the second is the 161.8 per cent extension.
Fibonacci price extension targets are using Fibonacci ratio relationships of previous swings to identify where support might be seen.
In the short-term, a rise above Thursday’s high of 2,824.52 is the first bullish sign that might occur, with a daily close above that high indicating there might be more strength to come. The bounce could then have legs if we see a daily close above last Wednesday’s high of 2,840.81.
The Abu Dhabi Securities Exchange General Index (ADXGI) increased by 34.84 or 0.72 per cent to close at 4,906.87.
Even so, market breadth leaned on the bearish side, with 16 declining issues against 11 advancing. Volume increased to a seven-week high as the index reached its highest weekly closing price since the July 2015 peak.
Last week’s close is a new weekly closing high for the long-term uptrend and the highest weekly close since November 2014. These are bullish signs. The ADXGI continues to act as if it wants to go higher.
After consolidating in a relatively wide range for a couple years, the ADXGI initially broke out of the range in early June before pulling back. Subsequently, bullish follow-through occurred five weeks ago as the index exceeded that prior high and has kept going.
The first target following the initial breakout was 4,902.09 (July 2015 swing high) and it was hit two weeks ago.
A minor target is next around 5,004 (November 2014 swing high), and then a potential resistance zone up to the 2014 peak of 5,255.35.
Given the bullish trend that is now progressing an eventual breach of that 2014 high zone seems likely at some point.
At first though watch for signs of reversal or consolidation once getting up into that price zone.
There is a clear and therefore potentially significant support zone around last week’s low of 4,797.20 as the prior two week’s also found support in that area. Therefore, a drop below that support will be a drop to a four-week low, which would be short-term bearish.
Stocks to watch
This week we look at a beaten down stock, DXB Entertainments.
DXB is the third-worst performer year-to-date and over the past year, plus the fourth worst performer over the past three years.
It hit a record low of 0.32 several times over the past couple of months. At that point the stock was down as much as much as 81.9 per cent from its record high of 1.77 reached in August 2016.
Since hitting and testing the 0.32 support zone the stock has formed a potential bullish double-bottom trend-reversal pattern.
A break-out is needed for a trigger and confirmation of strength, and that occurs on a decisive rally above 0.356. There is also a bullish divergence showing on the 14-day RSI which improves the chance for an eventual breakout.
Following a breakout, the next potential resistance zone is around the 0.442 swing high from late-May.
However, if DXB can close above that high on a daily basis, the intermediate-term outlook for the stock improves as a bullish trend reversal should then be in place.
Bruce Powers, CMT, is a technical analyst and global market strategist.