Further signs for caution are seen in both the daily and weekly relative strength index
20/04/2014 06:54 AST
The Dubai Financial Market General Index (DFMGI) fell by 77.18 or 1.59 per cent last week, ending at 4,762.21. Volume also fell, hitting a six-week low, while declining issues were a little more than double advancing at 24 to 10, respectively.
This is the first week in five that the index has closed lower and it did not exceed the prior week’s high, creating what’s referred to as an inside bar. An inside bar is where the high low range of the current week is contained within the range of the prior week. It’s a sign that momentum (price rate of change) is slowing.
Further signs for caution are seen in both the daily and weekly relative strength index (RSI), a technical indicator to help measure momentum. As of last week there is a divergence starting on the weekly time frame between what the RSI is saying and the price trend. A divergence between the price action and the RSI is where price continues higher while the RSI is showing weakening momentum, over some period of time. Once that happens the odds for a correction lower increases. This doesn’t mean that it will happen immediately, and price can still continue higher. But if the trend continues higher it’s likely to do so at a slower pace. Given that this divergence is on a weekly time, the conclusion could take longer to play out.
Adding further weight to the analysis is that for the past two weeks the DFMGI has been in an area of long-term resistance. The recent high is at 4,864, within a price zone (approximately 4,800 to 5,103) where resistance was seen on a monthly basis multiple times in 2005/06. Further, the index completes a 50 per cent retracement of the long-term downtrend, which starts from the 2005 high, at 4,919.38. Retracement levels of prior trends is another way of identifying potential resistance areas. In this case it tells us that, since hitting a low in January 2012 the DFMGI has recovered 50 per cent of its value.
Further weakness becomes more likely on a daily close below last week’s low of 4,655.82. A minor support level is then at 4,550.85, with more significant support starting around 4,255.
Abu Dhabi
The Abu Dhabi Securities Exchange General Index (ADI) declined by 21.06 or 0.41 per cent last week to close at 5,156.65. Although volume was lower, it remained the second highest level of the past twelve weeks. The majority of issues closed lower with 27 declining and 15 advancing.
Volatility during the week was low with the index managing to just barely exceed the prior week’s high before ending not too much lower. The high for last week was at 5,192.67, while the prior week’s high was at 5,184.
Overall, the ADI is maintaining its upward bias, closing less than one per cent away from the week’s high. This also keeps it right at an important potential resistance zone with a peak of 5,158.56. A decisive break above the zone is an important bullish indication that is likely to lead a moves higher. But so far the advance is on hold. That zone comes from the 2008 peak, which ended a one-year rally, leading to a crash from the 2008 global financial crisis.
Even though short-term behaviour — close near most recent peak, higher volume, and move above important resistance zone — is a positive for the ADI, the index has not yet decisively moved above it, thereby maintaining risk of weakening.
Evidence that resistance is increasing would be indicated on a drop below last week’s low of 5,078.28, and confirmed by a daily close below that price level. Support would then be around 5,004.34, the most recent peak which was exceeded to the upside two weeks ago.
The short-term uptrend represented in the weekly chart will be maintained unless there is a move below the two-week low at 4,922.32.
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