Dubai

Last week the Dubai Financial Market General Index (DFMGI) fell by 32.05 or 0.87 per cent to end at 3,650.76. There were 18 advancing issues against 21 declining, while volume slightly exceeded the previous several weeks.

The dominant long-term chart pattern that has been developing for a little over six months is related to the process of a downtrend transitioning into an uptrend. Potentially, because patterns can fail and sometimes do. So, when we discuss chart patterns the potential for failure and an alternative scenario to what is initially anticipated is always a possibility. Chart analysis can give us a likely scenario for the future but not a certainty.

In May 2014 the DFMGI peaked at 5,406.62. That peak was followed by a 20-month overall decline into the 2,590.72 bottom reached in January 2016. One of the ways to identify dynamic resistance of the downtrend is by drawing a descending trend line starting from the September 2014 high. It’s dynamic because the potential resistance price represented by the line changes over time due to the angle.

At the same time a breakout above the trend line (resistance) provides an indication that the trend, in this case the long-term downtrend, may be beginning the process of reversing into an uptrend. For the DFMGI the uptrend starts from the January 2016 low. The downtrend line was exceeded decisively in July of last year and the index has stayed above the line since then.

In financial markets, once price moves above resistance of note, many times represented by a line, it will eventually come back down to some degree to test that line or price area as support. This is part of the normal evolution of an uptrend and is generally bullish behaviour. Following the breakout above the line in July the index pulled back to test the line as support (3,195.49 November swing low), and it held. Support was seen and was followed by a thirteen week (short-term) uptrend that we remain in today.

The pattern of price behaviour discussed above is generally bullish. Also bullish is the fact that during the current short-term rally the DFMGI broke out above the three prior peaks that occurred in 2016 (3,604.70 to 3,658.61). Those peaks represented a resistance zone of a nine-month consolidation rectangle pattern where the index was range bound. The breakout above those highs occurred six weeks ago and triggered a continuation of the longer term uptrend that starts from the January 2016 low. That uptrend is now in its thirteenth month.

Since the breakout the index has been consolidating within a relatively narrow price range, and it has done so around support of the rectangle. In other words a prior resistance zone (three peaks from 2016), is where we’re now seeing a support zone. The bottom of that price zone is last week’s low of 3,608.40 and the top of the zone is 3,738.69.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) gained 123.28 or 2.77 per cent last week to close at 4,569.49, its best performance in nine weeks. There were 22 advancing issues and 13 declining, while volume fell slightly to a five-week low.

Last week’s rally came off an important support zone defined by a number of trend indicators. These include the prior swing low (4,436.65) from late-December, support of both the 200-day ema and 55-week ema, and the 50 per cent retracement (4,446.57) of the uptrend coming off the November low. The low of the recent pullback is at last week’s low of 4,439.03.

A strong rally as seen last week is a good indication that the pullback is over and the longer term bullish sentiment can again drive the index. However, such expectations are not confirmed until there is a daily close above last week’s high of 4,586.88. Once that occurs the ADI would again have a good chance of eventually busting above the recent 4,714 peak. Higher targets include the July 2015 peak at 4,902.09.

Stocks to watch

Takaful House was up 1.77 per cent last week to close at 1.15. The stock has been in a retracement since hitting resistance at 1.61 six weeks ago. Since then it has fallen as much as 31.7 per cent as of the 1.10 low hit in each of the past two weeks.

Support of the pullback is right around support of the 55-day ema. It’s therefore possible that Takaful House has found a bottom for the retracement and it could be close to moving higher again. A decisive move above the two-week high at 1.25 will give a bullish signal. Whether it can keep going after that or not remains to be seen.

The stock had two sharp rallies over the past eight months. The first was in June of last year where Takaful gained just over 136 per cent in five weeks. A 22-week consolidation retracement followed. Once that retracement was complete the stock took off again, jumping 75 per cent in just two weeks.

Dubai Islamic Insurance & Reinsurance broke out of a bullish wedge last week as it closed above the downtrend line and above 1.03. The stock was up 4.04 per cent to end at 1.03 as volume spiked.

A bullish wedge is a trend continuation pattern. Last week’s breakout marks the potential beginning of a second leg up in the stock following a 124.6 per cent three-week rally starting near the end of last year.

Since hitting a high of 1.24 five weeks ago the stock has been in a retracement, which took that form of a wedge. The pattern has formed at support of the 21-day ema, another bullish sign. Support and the low of the pattern is at 0.95.

One concern is that although the breakout was decisive Dubai Islamic closed relatively weak, in the lower half of the week’s range.

Bruce Powers, CMT, is chief technical analyst at www.MarketsToday.net. He is based in Dubai.