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Legendary Dow theorist Richard Russell says investors should approach the latest dow theory buy signal with trepidation.In brief, Dow theory says that when the Dow Jones Industrial Average and the Dow Jones Transportation Average move in tandem, up or down, the rest of the market will move with it. If one is making a new high, while the other is not doing well, you should be sceptical of the durability of the rally.
We told you about a developing Dow theory buy signal a couple weeks ago — the Dow Transports hit a high, catching up with Dow Industrials, which had also hit a high.
But Russell warns that Dow theory doesn’t operate in a bubble. There’s another element to consider: the Relative Strength Index, or RSI. From King World News:
It seems so easy — all the Dow has to do is climb another 174 points, and eureka, it’s at a new record high, and at the same time it has confirmed the new record highs in the Transportation Average.
Wait, note that RSI is at its severe overbought zone for the first time in almost two years. In the last five years, RSI has signaled overbought five times. At the bottom of the chart we see the 89-day rate-of-change (this is momentum).
Here’s the chart via King World News:
With markets near there all-time highs, it’ll be interesting to see which market experts will be proven right and which ones proven wrong.
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