TRADING CENTER INDICATOR (TCI): TECHNICAL ANALYSIS ON DOW JONES INDUSTRIAL

The Dow Jones Industrial Average closed on Friday, November 16th, at 12,588.31 points. The downtrend that started one month ago is continuing. In mid-October 2012, Dow was around 13,661 points, so it has dropped more than 1,000 points since then. To estimate how long this downtrend may last, we applied the TCI Indicator to the Dow Jones Industrial Average, and here are the results.

TCI on Dow at a Glance:

• Dow Price: 12,588.31
• Short-Term Trend: ↓
• Mid-Term Trend: Possible Rebound, ↑
• Possible Turnaround Dates: November 20 / November 30

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TCI Indicator on Dow Jones

The table below shows recent daily data for the Dow Industrial, with the last column displaying the daily TCI indicator value. It’s clear that the Dow is trading inside a strong downtrend channel. The current TCI reading is about -11.02 (based on the Dow closing at 12,588 points). Historically, this TCI level has offered traders good returns of 5–10%.

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Turning TCI Forward

Looking ahead with TCI calculations, it seems the Dow’s downtrend may not be over yet. Two key dates stand out:

A) November 20, 2012 (TCI = -12.06)
B) November 30, 2012 (TCI = -11.37)

On these dates, the downtrend could reach a low point, followed by a corrective upward move.

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What Price Pattern Should We Expect?

The downtrend is likely to happen in two phases:

1. At point (A), the downtrend peaks, followed by a weak uptrend correction of about +2% to +4%, lasting a few days.

2. Then, after a few days of positive news, the Dow may drop again until point (B) on November 30. After that, a strong rebound could start, lasting weeks and possibly turning into a Christmas rally.

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How Strong a Rebound Can We Expect?

This depends on the lowest point the Dow hits in the next weeks. Possible bottoms are:

1. Optimistic scenario: Dow bottoms at 12,502 points (due to unexpected good news).

2. Basic scenario: Dow bottoms at 12,101 points.

3. Worst scenario: Dow bottoms around 11,500 points (due to unexpected bad news).

Using TCI to predict the bottom, the minimum TCI value expected is about -20. Since we are now around -12, we could see a further drop of about 8 points on the TCI scale. This translates to roughly an 8% drop in the Dow, or about 1,000 points. This worst-case scenario is less likely; the basic scenario expects a drop of about 300–400 points.

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TCI Chart on Dow Industrial 2007-2012

The chart below shows the daily TCI indicator for the Dow from November 16, 2007, to November 16, 2012.

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Final Conclusion:

Every year, there is usually a Christmas rally in the stock market. It typically starts in the first or second week of December and lasts until the last week of December. During this time, markets often deliver good returns of 5–10%. We expect this to happen again in 2012. For traders planning to buy stocks or index-based derivatives, we suggest waiting a few days—perhaps until the end of November 2012—before entering the market.

 

□ G. Protonotarios 

Trading Center, 19th of November (before opening)