Just over 12 months ago, the Dow Jones index put in its best performance in nearly 50 years.

At that time, the SPDR Dow Jones Industrial Average ETF Trust (DIA) rallied 14.1% in a month. Those gains topped more than 20% by the time it peaked in mid-December last year.

One of the driving forces behind that rally was the rotation out of tech into old-style industrial stocks.

And we’re seeing that again now…

Since bottoming in October, DIA recently rallied around 12% in just over a month.

But now, signs are hinting that it’s overbought. So let’s check how things might unfold from here…

Developing Retracement

After retracing off its December 2022 peak, DIA established a base at the start of 2023.

From there, it traded in a range-bound pattern before rallying into the middle of the year.

The gentle rise of the 50-day Moving Average (MA, blue line) shows the slow pace of that rally:

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

Throughout this rally phase, the Relative Strength Index (RSI) mainly stayed in the upper half of its range (above the green line).

But the RSI went into overbought territory (upper grey dashed line) in late July. And DIA’s rally petered out.

DIA locked in its peak on August 1 with the RSI forming an inverse ‘V’ and reversing.

DIA’s retracement began to develop as the RSI trended lower (orange line). That showed buying momentum was falling.

The 10-day MA (red line) crossed below the 50-day MA with both tracking lower. That added further confirmation of the downtrend.

Within that downtrend, though, you’ll notice some countertrend rallies.

Take another look:

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

These coincided with the RSI forming a ‘V’ and rallying from or near oversold territory (red circles).

Those first two counter-rallies in August and October ended when the RSI couldn’t break up through resistance (green line).

Only when the RSI finally broke higher in November did DIA’s current rally gain traction.

You can see the strength of that rally by the steep angle of the 10-day MA crossing above the 50-day MA.

But that surge pushed the RSI well into overbought territory.

So what can we expect from here?

Short-Term Moves

With only around 15 trading days left in 2023, we’re running out of time for a major move before the year is out.

But that doesn’t mean there won’t be potential trades.

We’ve just got to focus on short-term mean reversion trades.

With the RSI rallying strongly, I’ll be watching to see if DIA has shot up too far and is vulnerable to a pullback.

A short, sharp reversal (inverse ‘V’) from the RSI could let DIA retrace quickly and provide the setup for a short trade.

That could enable us to bank some handy profits as we ready ourselves for a busy 2024.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Mailbag

Do you plan to trade DIA in the coming days? Send in your thoughts to feedback@opportunistictrader.com.