Watch for short-term correction in both Dubai and Abu Dhabi

The Dubai Financial Market General Index (DFMGI) finished its fifth consecutive week of higher prices, rising 25.14 or 0.85 per cent to close at 2,973.94. Market breadth, however, was on the bearish side, with 24 declining issues, which was twice the advancing at 12. Volume increased from the previous week.

Each of the past four weeks saw the index close above the prior week’s high on a weekly basis, which is short-term bullish. A break above last week’s high of 2,986.36 gives the next bullish signal with the index then heading up into a resistance zone that starts around 3,033 and goes up to the most recent swing high of 3,109.30 from early-June.

Downward pressure remains, however, in the intermediate term as the DFMGI is still in a clear downtrend with a series of lower swing highs and lower swing lows. That won’t change at this point until there is a daily close above 3,109.30.

Given the downward price structure of the index and its behaviour over recent months it seems likely that the current short-term rally will meet resistance at some point and lead to a pullback and possible test of the most recent low of 2,805.44 as support. Overall, some consolidation around the bottom would be healthy for the market as it can establish a strong bottom of support that could lead to a sustained advance. So called ‘V’-shaped bottoms are not as common as consolidation bottom-reversal patterns such as triple bottoms, head and shoulder bottoms and double bottoms.

The 14-day Relative Strength Index (RSI) momentum oscillator is showing a bullish divergence which indicates that upward momentum is improving. This is supportive of the idea that near-term weakness could be short lived before buying pressure again dominates.

A drop below last week’s low of 2,985.33 is short-term bearish and could be the start of such a test of recent lows. The next lower potential support zone would then be around the two-week low of 2,911.81, followed by the three-week low of 2,876. Once support is found and price turns back up, the DFMGI should be ready to resume an uptrend. Of course, a drop below 2,805.44 low from six weeks ago continues the multimonth bearish decline.

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADXGI) fell by 32.77 or 0.68 per cent last week to close at 4,811.42, putting an end to a five-week winning streak. There were 12 advancing issues and 13 declining, while volume bounced to a five-week high.

Despite a down week underlying strength still dominated as the week’s range was very narrow and price stayed relatively close to the recent multi-year high of 4,861.60. Last week’s high managed to exceed that high by just a bit to 4,862.86, before closing below it and at a six-day low. A further pullback is certainly possible from here, with the next key support level being around the prior three-year highs of around 4,745 to 4,714, and then down to 4,651.

If instead further strength is seen soon, then a breakout and daily close above last week’s high would provide the bullish confirmation. The next higher target zone for the index is around the July 2015 peak of 5,233, followed by the November 2014 swing high around 5,004.

The ADXGI is in its strongest position in over two years given the recent breakout of a two-year relatively sideways consolidation range. That breakout increased the odds that it will eventually exceed the 2014 highs as the long-term uptrend, off the 2009 and 2012 lows again kicks in. As of last week’s close the ADXGI is only a little over 9 per cent from its last important high of 5,255.35 hit in May 2014.

Looking closer at hand, the January 2016 initial rally was around 24 per cent before the index moved into a prolonged period of up and down choppy moves. That was the first leg up in an uptrend. The second leg up began from the December 2017 low and has advanced 14.5 per cent so far. This analysis by itself points to at least another 10 per cent or so upside.

Stocks to watch

Dubai Islamic Bank (DIB) was the fifth best-performing stock on the Dubai market last week, rising 0.13 or 2.6 per cent to end at 5.10. Weekly volume reached a bullish five-week high during the advance as DIB broke out to a seven-week high and a 23-week weekly closing high.

For the past five months or so the stock has been forming a potential measured move where the second leg up off the 4.657 bottom in April may match the price appreciation of the first leg up.

This will occur at 5.463, providing an initial price target of over 7 per cent. However, investors should watch for short-term weakness that might provide an opportunity to enter the stock below last week’s closing price.

Last week’s low of 4.97 is initial support, followed by 4.93, and then 4.85. A drop below the lower number will turn the outlook short-term bearish.

The next potential target above the completion of a measured move would be from approximately 5.60 to 5.64, consisting of previous weekly resistance and a couple Fibonacci resistance levels from different measurements. Fibonacci ratio analysis provides a mathematical way to determine possible resistance price areas.