Saturday, August 05, 2006

Support, Resistance, and the DFM

A local newspaper said the Dubai Financial Market had broken through support at 400. Round numbers tend to make headlines as the markets pass through (in either direction) but they are not support. Chartists look for points where the index keeps bouncing. In May and early June, the DFM kept bouncing back up from the 455 level, then broke through and dropped to about 416. Then 416 provided support until the beginning of August. Now support is around 393.

Resistance is the opposite, a level from the which the market bounces back down.

There is no guarantee that the market won't break through this support and continue down, or break through the resistance (now about 405) and continue up.

Support is a real phenomenon, though it's not clear chartists can really spot it or profit from it. Investors can place two kinds of orders, market orders, which will be filled at the current price, and limit orders, which can only be filled at a price not worse than the limit.

The brokers have all the limit orders entered in their order book. A large buy order (or a large combination of buy orders) at a certain price does provide support, but only the highest buy order is shown on the DFM, so one can't really see the true support for the stock.

For EMAAR, as of today, someone offered to sell 505,142 shares for 10.85, and someone else has bid to buy 156,437 shares at 10.80.

Today was a very slow day, but the volume was still over 2,000,000 shares, so the price could easily go below 10.80 (or, for that matter, rise above 10.85) tomorrow; however, the larger sell offer means the odds are slightly greater that EMAAR will go down tomorrow. If the buy bid were larger than the sell offer, we would expect the stock to go up.

If we could see the entire order book, we would have a very good idea about where the stock was heading, but no market in the world makes that information available except to market insiders.

Meanwhile, the chartists keep looking for patterns that will make them money, one way or the other. Some succeed, some don't.