With a whopping 14.1% gain in October, the Dow Jones just booked its best monthly performance in 47 years.

Compare that to the Nasdaq and S&P 500 – which recorded 4% and 8% gains, respectively – over the same time.

The huge difference in performance represents a fundamental change in the market – a rotation out of big tech and into old-fashioned, large-cap value stocks.

Like any change in money flow, though, this rotation can get out of whack. The Dow is vulnerable if its constituent stocks get bid up too far.

So after such a massive run last month, today I’m going to see what’s in store for the SPDR Dow Jones Industrial Average ETF Trust (DIA).

A Gradual Trend Down

The chart of DIA this year shows a classic downtrend in action. Take a look…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

The 50-day moving average (MA – blue line) has gradually trended down, with DIA making a series of lower highs at A, B, and C.

Throughout the down move, the Relative Strength Index (RSI) has also predominantly remained in the lower half of its range (below the green line) – another bearish signal…

Within the prevailing downtrend, there’ve been numerous counter-rallies.

Each of these moves coincided with the RSI forming a ‘V’ out of oversold territory (lower grey dashed line) and then rallying higher.

Most of these moves petered out when the RSI ran into resistance (green line). And the rally up to ‘C’ represented the first time the RSI was able to gain traction in the upper half of its range.

That rally to ‘C’ peaked, though, when the RSI reversed out of overbought territory (upper grey dashed line)…

Then, as the RSI tracked down through support and into its lower band, DIA’s fall continued.

After testing resistance in September (which briefly sent DIA higher), the RSI again reversed and kept falling until it went into oversold territory (lower grey dashed line).

With the RSI forming a ‘V’ and then rallying higher (red line), DIA was able to start building support (orange line).

Take another look at the DIA chart…

SPDR Dow Jones Industrial Average ETF Trust (DIA)

Source: eSignal

As you can see, DIA’s rally off that support level really started to build momentum when the RSI burst back into the upper half of its range.

The strength of that rally also saw the 10-day MA bullishly cross back above the 50-day MA at almost right angles.

However, the RSI is now also warning us that DIA could be overbought…

So what am I looking for around here?

Definitive Reversal Is Key

As the chart shows, the RSI has only just recently gone into overbought territory. And what happens around here is key…

If the RSI forms an inverse ‘V’ and then reverses like it did at ‘C,’ then we can expect that DIA will top out, forming a new peak at what would become ‘D.’

A quick move from the RSI back to support could provide the setup for a short trade. Any prolonged down move beyond that would then depend on the RSI breaking back into the lower half of its range.

As always, though, we should see a definitive reversal in the RSI before committing to any short move…

If the RSI instead remains around overbought territory (without a definitive down move), then we know that this up move might still have further to go.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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