Dubai: The Dubai Financial Market General Index (DFMGI) dropped by 23.85 or 0.86 per cent last week to close at 2,754.91. Market breadth was on the bearish side as there were 13 advancing issues and 18 declining. Volume fell to an 11-week low, but that’s to be expected given that there were only four trading days due to a holiday.
The dominant developing pattern that seems to be driving the DFMGI is the breakout of a bullish descending wedge pattern that occurred several weeks ago. A descending wedge is essentially a downward sloping consolidation pattern. Since it has occurred at the bottom of a trend it is a potential trend reversal pattern. So far, the breakout has been followed by two weeks of retracement that has seen the index flirting with support around the downtrend line that goes across the top of the pattern. Previously, that line represented dynamic resistance, and now since a breakout occurred it is support.
There’s no guarantee the breakout of the wedge will follow-through to the upside but we have to assume it will unless there is evidence to the contrary. A failure of the bullish wedge will occur on a drop below the multi-year low of 2,706.57 reached a month ago.
Next, watch for a decisive move above last week’s high of 2,785.06 for a bullish trigger and indication that the two-week pullback is likely coming to an end. At that point upside momentum should increase as the enthusiasm represented by the wedge breakout kicks in again. Then we need to see a daily close above the three-week high of 2,833.34 to confirm a continuation of the breakout.
The classic minimum target from a wedge breakout is the beginning of the pattern. In this case that would be around the June swing high of 3,109.30. First though the DFMGI will have to contend with a more minor resistance zone starting at the 2,854.49 swing high from September, and then the 2,986.36 swing high from July.
Last week the Abu Dhabi Securities Exchange General Index (ADI) fell by 70.71 or 1.4 per cent to end at 4,984.75. There were 11 advancing issues and 14 declining, while volume was lower due to the four-day trading week.
Following an attempt to follow-through on a breakout to a new trend high early in the week, the ADI lost upward momentum by Wednesday after hitting 5,079.97. Subsequently, the week’s close was well within the multi-week consolidation pattern that the index was attempting to move out of.
So far, the breakout has failed. Further signs of strength are now needed to keep the bulls intact. Such behaviour around a breakout is not particularly unusual, but it does show that the bulls are not as aggressive as they might be. Last week’s price action just prolongs the uncertainty as to what might happen next. However, a continuation of the breakout can be anticipated unless further weakness of note is seen.
The short-term pattern of the past several weeks still maintains an uptrend structure. This will be the case unless there is a drop below the most recent swing low of 4,939.10. At that point another test of recent lows around 4,861 to 4,836 becomes likely. That’s the bottom of a 12-week range that the ADI has attempted to break out of. If the lower support zone of the range is tested, then there is always the possibility that the index falls below it and continues to fall. Of course, if that happens a continuation to new trend highs in the foreseeable future is less likely.
Last week’s high of 5,079.97 is the price level to watch on the upside. A decisive rally above that high will provide a new bullish trend continuation signal. After that the ADI heads towards the 2014 highs around 5,185 to 5,255.35.
Stocks to watch
A potential double bottom trend reversal pattern has formed in the price chart of Aramex. Aramex completed a 61.8 per cent Fibonacci retracement and a 32.4 per cent decline seven months ago as it found support at 3.72. That’s the first bottom. The first leg up in a possible new short-term uptrend followed leading to resistance at the 4.59 swing high four months ago. Subsequently, the stock retraced to the second bottom at 3.89 last month.
Now, there are signs the stock wants to continue higher. Last week Aramex advanced by 1.9 per cent to close at 4.33. Volume for the month, so far, has jumped to a 19-month high. Many times, rising volume can be an early sign of coming strength.
A move above the three-week high of 4.40 provides the next bullish signal. The stock can also be watched for new entries on weakness. Support is at the three-week low 4.10, followed by the most recent swing low of 3.89. That swing low is key as the outlook for Aramex becomes significantly more uncertain if price drops below that low.
A more significant bullish signal is given on a breakout of the double bottom, which occurs on a daily close above the most recent swing high of 4.59. At that point a continuation of the short-term uptrend is triggered as well. The next zone of potential resistance will then be at 4.75 and 5.12.
Bruce Powers, CMT, is a technical analyst and global market strategist.