UAE markets start to align towards a more powerful outlook
Last week the Dubai Financial Market General Index (DFMGI) moved higher by 20.64 or 0.74 per cent to close at 2,825.85. There were 20 advancing issues against 18 declining, while volume rose a little above the previous week.
The DFMGI confirmed a breakout of a bullish descending wedge pattern which barely began the week before last. At that time, the week ended above the downtrend line that marks the top of the wedge, but just barely.
Since the wedge is forming at the lows of a declining consolidation pattern, it is considered to be a trend reversal pattern. If the falling wedge price formation had formed rising and counter to the dominant trend, it would be considered a trend continuation pattern instead. The dominant trend in the DFMGI has been down ever since the October 2017 high of 3,684.19. As of last month’s low of 2,706.57 the index had fallen 26.5 per cent off that high.
Next, watch for additional signs of strength to confirm the bullish characteristics of the past couple of weeks. First, a daily close above the most recent swing high of 8,254.49 will provide a new bullish signal.
Price would be rising above a previous key resistance zone that makes up the price structure of the downtrend. A move above that swing high violates the integrity of the series of lower swing highs and lower swing lows that construct the trend pattern. By itself, such a signal indicates a likely trend reversal, from down to up. Nonetheless, when combined with a breakout of a wedge reversal pattern the potential of the breakout is improved.
Another method to help identify returning strength in the market is to look at the size of the previous five countertrend rallies.
The maximum gain is 8.3 per cent before resistance showed up and sellers turned the market back down. This means that a greater than 8.3 per cent rally in the current advance is a sign of relative strength compared to prior rallies in the downtrend, and a change in that pattern. An 8.4 per cent advance would occur at 2,935.
Abu Dhabi
The Abu Dhabi Securities Exchange General Index (ADI) gained 108.08 or 2.20 per cent last week to end at 5,028.75. This was the strongest performance in 25 weeks. More significantly, the index ended at a new weekly closing high for the long-term uptrend and the highest weekly closing price since early October 2014. Most issues participated in the bull move, with 24 advancing and nine declining. Volume fell slightly below the prior week’s level.
The ADI has now positioned itself to move into new trend highs. It had a chance to fall deeper into a pullback two weeks ago as it broke down from a 10-week relatively tight consolidation range. Instead of continuing to fall buyers stepped in and moved the index higher and into its strongest position of the past four years or so. Resistance of the four-week range, that takes the form of a rectangle, is at 5,039.83. Price was rejected there in late-August leading to a consolidation phase.
Next, watch for a daily close above the August high to confirm an upside breakout and trend continuation for the 34-month uptrend that began in January 2016. At that point the ADI heads towards its prior swing highs from 2014 around 5,160 to 5,158.66. That high price is only 2.6 per cent away from last week’s close. A breakout above that resistance range will trigger another bullish trend continuation breakout for the long-term uptrend that begins off the 2009 lows.
Of course, until a breakout is confirmed there is always a chance that the recent highs will hold or turn an advance, or at least stall upward momentum for a short time. Last week’s low of 4,894.76 can be watched for near-term support. If the index falls below there then the above bullish scenario is put on hold or negated for the time being.
Stocks to watch
It turns out that Damac Properties also had a breakout of a falling wedge last week. A bullish breakout was triggered on a move above the four-week high of 2.03 as volume jumped to a 23week high. The week’s high and close of 2.13 is right at resistance of the six-week high. This means that Damac hitting 2.14 will provide a new sign of strength as the most recent swing high in the downtrend would be exceeded to the upside, which is bullish.
The next price level to watch is 2.18, a minor swing high. It is followed by the top of the wedge at 2.35. The top is also a swing high. A daily close above either of those swing highs signals strength, while a break above 2.35 shows more significant and sustainable strength.
It’s a good sign that Damac has broken out of a wedge trend reversal pattern at the same time as the market index. It shows a degree of symmetry between the individual (Damac shares) relative to the whole (market). Another way to think of it is that the outlook of each is aligned.