Long-term breakout seen in Abu Dhabi

A decisive break out of a long-term consolidation pattern as confirmed last week is very bullish and puts the outlook for the ADX in a most positive light |

Last week the Dubai Financial Market General Index (DFMGI) improved by 22.76 or 0.78 per cent to close at 2,948.80. There were 15 advancing issues and 21 declining, while volume was down to a 12-week low.

As of last week’s 2,954.87 high, the index was up 5.3 per cent off the 2,805.44 low from five weeks ago. That low completed a 23.85 per cent decline off the October 2017 swing high of 3,684.19. The question now is whether the low is significant enough to stop the downtrend leading to a continuation higher. There are some clues indicating that this could be the case, although we won’t have greater certainty until further progress is made to the upside.

There are a couple pieces of analysis that improve the possibility that the recent low may be a long-term bottom.

First, the prior decline leading to the June low completed a 78.6 per cent Fibonacci retracement of the previous advance that started from the January 2016 lows at 2,836.30. That Fibonacci ratio is the square root of the primary 61.8 per cent Fibonacci ratio. It’s not as widely known but potentially significant nonetheless.

In Fibonacci analysis the price identified by the retracement ratio can point to a high probability support zone (in this case we’re looking for support and measuring the retracement of an uptrend).

Then we have the completion of a head and shoulder’s top target that was reached at 2815.3, also pretty close to the recent low. A head and shoulders trend reversal pattern formed in the chart of the DFMGI over the past couple of years as the index remained range bound. The index broke out of the bearish pattern on a drop below 3,326 in early-February.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) was up 74.10 or 1.55 per cent last week to end at 4,844.19.

Market breadth was about even with 14 advancing issues and 12 declining, while volume was flat. Following a couple false break-out attempts into new trend highs over the past four month the index finally executed a new breakout two weeks ago, closing near the high for the week and at the highest weekly closing price since the early days of August 2015. That’s not enough though to provide confidence in the breakout as further follow-through and additional signs of strength are needed. We got that last week as the ADI again hit a new trend high and closed strong, near the high for the week. Last week was the fifth consecutive week of positive performance.

For the prior two years or so, the ADI has been consolidating within a relatively wide range and has been unable to continue the aggressive thrust higher that started off the January 2016 low of 3,731.56. From that low, the index gained 24.3 per cent by the first peak reached 14 weeks later.

A decisive break-out of a long-term consolidation pattern as confirmed last week is very bullish and puts the outlook for the Abu Dhabi market in a most positive light. At the same time there remains this incredible and very unusual divergence with the DFMGI that looks to have started around the end of last year.

The ADI has trended higher while the DFMGI has been in a relentless decline. There doesn’t seem to be any similar relationship between the two indices for at last the past 10 years.

The ADI is next heading towards the 5,233 price area, which was a peak from back in July 2015. If surpassed, then it next contends with the top resistance zone from 2014. However, first watch the 5,000 area for some signs of resistance and then the peak around 5,255.

It is interesting to note that if the current intermediate-term advance (from November 2017 low) progresses in similar fashion as the first leg-up off the 2016 low, then the current advance would have increased by 24.3 per cent at 5,276. This would be a sign of market symmetry between swings. Even though the long-term view is improving, in the short-term, the ADI is getting extended and should be watched for a short-term pullback in the coming week or so.

Stocks to watch

Emirates NBD continues to evolve a long-term bullish cup with handle trend continuation pattern, which could easily lead to new highs. The handle of the pattern has been forming over the past four months and last week we saw some movement that put price smack up against resistance of the downtrend line of the handle.

A handle looks a lot like a flag pattern but is contained within a larger cup with handle pattern consolidation pattern.

Last week the stock was up 0.15 or 1.94 per cent to close at 10.55. Emirates is the best performer in Dubai this year and second past over the past year.

A daily close above last week’s high of 10.60 is the first sign that a break-out of the handle may be starting, with a daily close above 10.75 further confirming strength.

Full confirmation occurs on a daily close above the most recent swing high of 11.00.

That will also signal a break-out of the cup with handle at Emirates reached a 10-year high.