Short-term strength possible in Dubai

Last week, the Dubai Financial Market General Index (DFMGI) advanced by 18.78 or 0.73 per cent to close at 2,599.05. The DFMGI further confirmed a long-term bearish trend continuation signal last as it closed below the prior week’s low of 2,572.52 on a daily basis. Last week’s low was 2,478.70. Two weeks ago the bear trend triggered a continuation of the long-term downtrend that began off the 2014 highs as the index closed below the prior swing low from January 2016 at 2,590.72 on a weekly basis. As of last week’s low, the index has fallen as much as 54.2 per cent from the 2014 high of 5,406.52.

The above indications point to an eventual continuation of the long-term bearish trend. Nevertheless, in the near-term, the DFMGI is showing signs of a possible short-term bottom. It has reached extreme oversold conditions based on the 14-day Relative Strength Index momentum oscillator (RSI), and last week, there was a weekly reversal candlestick pattern formed.

The RSI is a technical indicator for momentum and it shows that the index has gotten ahead of itself and gone a little too far too fast to the downside. It has the most extreme oversold reading since August 2015. Therefore, the DFMGI is due for a swing in the other direction or up. The weekly candlestick pattern is indicating that the time may be near.

A move above last week’s high of 2,603.38 will provide a bullish signal. There are then two price areas to watch for resistance that could stall or turn a rally. The first is around the prior support zone of 2,706, and then up to the prior swing high of 2,834.29. If a daily close occurs above the swing high the bearish outlook for the DFMGI will start to change. This is because that swing high defines the downtrend price structure of a series of lower swing highs and lower swing lows. On the downside, there are a couple price areas to watch where support may be seen. Regardless, given the dynamics and long-term trend pattern within the index, it looks like the lower price area will eventually be reached. However, this could take some time.

The first price area to watch is around 2,409. That’s where monthly resistance was seen at a peak in October 2009. The second price area is from 2,243 to 2,174. It’s given greater significance since it is identified in a few different ways.

First, it is where there was monthly support and resistance in the past. In addition, there are two Fibonacci ratio levels that occur within that zone from long-term swings.

Fibonacci ratio analysis measures prior swings to identify higher probability support levels (in this case).

Abu Dhabi

The Abu Dhabi Securities Exchange General Index (ADI) fell by 15.14 or 0.31 per cent last week to end at 4,861.54. So far, since breaking down from a multiweek consolidation top two weeks ago (on move below 4,836.08), the ADI has stalled and consolidated into a relatively tight range. In addition, last week was an inside week, which is another way to identify the consolidation. The range provides a high and low price level that can be used to identify what might be coming next. At the same time, keep in mind that the consolidation may continue to evolve over the coming weeks and the current parameters of the range may change.

As it currently stands, if the high of the range at 4,915.41 is broken to the upside the index may continue higher. However, it will likely encounter resistance on the way up as a move up is smack in the middle of the multi-week range noted above with a high of 5,079.97 (2018 high and multi-year high).

Support for the consolidation zone is around last week’s low of 4,762.60. Note that last week’s low fell slightly below the prior week’s low, but the price then quickly reversed higher. This is part of the process of the consolidation zone determining its range. A daily close above or below a price level can help provide clarity as to the potential significance of the move.

Stocks to watch

Air Arabia is in the process of forming a potential head and shoulders bottom trend reversal pattern. Following a decline of nine months or so, a bullish reversal is possible. If correct, then last week’s low of 0.98 will be the bottom of the right shoulder.

As with all price patterns, a breakout trigger is needed to confirm the pattern. Until then, the pattern could evolve into a different pattern or never signal a reversal. In this case the neckline, which defines the breakout resistance area, is around 1.06 and a daily close above that level confirms the pattern and breakout. The key then is to watch for signs of upward momentum that is sustainable.

If a bullish breakout does occur, then Air Arabia has the potential to get to 1.12 first, followed by the April swing high at 1.22, and then 1.33. Nevertheless, the higher target has a chance of being reached given the key reversal from the head and shoulders bottom.

A move above last week’s high of 2,603.38 will provide a bullish signal. There are then two price areas to watch for resistance that could stall or turn a rally.

So far, since breaking down from a multiweek consolidation top two weeks ago, the ADI has stalled and consolidated into a relatively tight range.

■ Bruce Powers, CMT, is a technical analyst and global market strategist.