Dubai blue chips face tricky resistance levels

"Prices are not house numbers, they are moving", an old trader's proverb says. While chart analysis is a basic tool in developed countries even among private investors, in the GCC traders are rarely seen using security price developments in order to predict future stock performances. Fundamentalists look at stock valuations, quarterly earnings figures and financial ratios. Chartists believe that market prices discount all available information and that they move in trends and patterns.

Dubai blue chips from a chartist's view

Emaar Properties is the heavyweight at the Dubai Financial Market (DFM). Dubai Ports (DP) World, the third largest port operator globally has the largest share by market capitalization at the Nasdaq Dubai. Both stocks have recovered significantly since the end of Ramadan. However, they failed to top old resistance levels, which, once they are "shaved", open the way to further stock price advances. During the last three months, Emaar advanced 20%, while DP World surged more than a third in value.

Emaar Properties is facing a tough resistance line at Dhs4. The share tried to break this level two times in 2010: at the start of January and during the spring rally in April. But then the Euro crisis and the volcano eruption in Iceland halted the early 2010 recovery worldwide. "There are no financial illusions", states one rule of the market efficiency hypothesis. A resistance level which proved solid once will not be broken easily. Consequently, Emaar shares failed again to break the Dhs4 line on October 13. Once Emaar breaks the Dhs4 sustainably, the level will become a support line and the next resistance level lies at Dhs4.50.

DP World sees resistance level

DP World surged on high volumes to around $0.56, a standard which it tried to break several times in 2010. But: "Markets have no memory" is another efficient market theory statement. That said, traders should beware of using support and resistance lines as marks to "play" with a stock within a price range. Nevertheless, both Emaar and DP World are also market indicators for their exchanges, similar to General Electric's role at the New York Stock Exchange (NYSE). General Electric is the only stock that has been part of the global bellwether index Dow Jones Industrial Average since the benchmark's launch in 1907.

Lack of empirical evidence

UAE investors can't look back that far. The DFM currently celebrates its 10th anniversary, while the Nasdaq Dubai was founded on September 26 2005 (as the DIFX). The good news is that both markets are currently merging, thus providing a more liquid environment, a basic condition for proper chart analysis.

Sufficient liquidity is the key in order to do a serious chart analysis. The value of equities traded on Nasdaq Dubai increased by 31% in the first nine months of 2010 compared to the same period in 2009, from $722m to $948m. The Nasdaq Dubai transferred its entire trading platform and clearing system to the DFM on July 10 2010. Only sufficient liquidity gives price movements pictures traders can deal with and compare shares like Emaar or DP World with their regional and international peers. As the last wisdom of the efficient market hypothesis states: "Know one stock, know them all".