UAE STOCKS: Consolidation likely to continue

Dubai: Markets move in waves of buying and selling that create trends, up or down, interspersed with periods of trendless consolidation (sideways). We're seeing consolidation now in the UAE markets with a decent chance it will continue for a little while longer.

The good news is that these periods of consolidation start to form patterns in the price charts which can be used to help identify clear areas for entering new positions or adding to existing positions.

Once price begins to break out of an apparent pattern it has a tendency to start to trend again. If used properly, price levels from the parameter of consolidation patterns allow for more immediate profit along with better risk management because a failure can usually be identified faster than it otherwise might.

Although the UAE market indices have been forming consolidation patterns most stocks have not yet clearly done so. A few worth watching are noted under Stocks to Watch below.

Dubai

Last week the Dubai Financial Market General Index (DFMGI) closed essentially flat, having declined only 0.63 or 0.04 per cent to close at 1,555.41. Volume was below the previous five weeks with advancing issues of 16 just slightly higher than declining of 13. Lower volume and even advancing/declining issues is consistent with a consolidation phase, which the DFMGI has been in for the past couple weeks.

So far the range of this two week consolidation pattern has been narrow with little pullback. Given the strong rally previously, this can be considered bullish behaviour.

The pattern has been forming in the area of the downtrend line which identifies the parameter (resistance at an angle) of the downtrend begun from the late October 2010 high. Recent trading activity has been taking place both above and below the line thereby identifying the low of the range at 1,524.26 as support, and the high of the range at 1,579.64.

Arguably more of the trading has occurred above the line, a slightly bullish sign as the process of what was resistance (of the downtrend line) is slowly starting to be identified by the market as support.

Further consolidation is likely in the coming week and healthy for the market as it needs additional rest before continuing higher, if it is to do so and be sustainable. Certainly momentum in the short term has declined but is still bullish overall and has not yet reached overbought conditions.

The next support level to watch below the current two week range is at 1,501.59 followed by 1,435.79, with the lower level more significant. A break below the lower level puts the recent rally into question and increases the chance of further declines after that, including the possibility of breaking the low of the year.

If the DFMGI breaks higher out of the current consolidation pattern then resistance could be found at the 200 period exponential moving average (ema) on the daily chart, now at 1,603.48. A close above 1,603.48 is an important sign of strengthening. If the DFMGI can then close above 1,637.15 it would indicate that the five month downtrend may have completed and turns the medium term outlook bullish.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) dropped only 10.04 or 0.39 per cent last week to close at 2,597.08 with volume staying close to the previous two weeks. Advancing issues beat declining only slightly at 21 to 18, respectively.

The daily chart of the ADI shows a larger and wider ranging consolidation pattern forming, than seen in the chart of the DFMGI. It's also occuring below the downtrend line rather than up against it, which would be more bullish.

Overall, this pattern is not as bullish as the pattern in the DFMGI and more time will need to go by before the pattern becomes clearer. If a consolidation pattern continues to develop then volatility will be low for the immediate future with activity levels probably declining. We can get an idea that volatility is declining by looking at the range of the past week, which was the shorter than at least the previous nine weeks.

There are several potential resistance levels to watch closesly. First, is 2,655.74, the top of the smaller consolidation pattern now forming. Just above there is the 200ema, currently at 2,665.74, followed closely by the downtrend line resistance. It's difficult to say which price to use for the trendline so it should be watched visually for now. Just above the trendline is a clearer range from approximately 2,690 to 2,692, which has been hit previously by the ADI as both support and resistance.

We need to see the ADI close above 2,729.90 before we can say that the five month downtrend may be over.

Stocks to watch

Aldar Properties began to ascend of its bottom several weeks ago and has since for a small downward sloping consolidation pattern. Details of this pattern so far indicate that selling pressure is diminishing. Watch for the pattern to continue to unfold with a move through resistance of Dh1.60 signaling a continuation of the uptrend.

Dubai Investments has been forming a tight consolidation pattern just below resistance of its 200ema. A close above Dh0.865 signals strengthening.

Recent price action as seen on the charts of Union Properties and Gulf Navigation has similar characteristics to Al Dar Properties.

A move through resistance of Dh0.35 for Gulf Navigation and Dh0.307 for Union Properties signals buyers coming back into these stocks more aggressively.

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

Disclaimer: Stock market investments are risky and past performance does not guarantee future results. Gulf News does not accept any liability for the results of any action taken on the basis of the above information.