Home / Top News / By one measure, the Dow is the most overbought in 117 years, but that may not be a bad thing

By one measure, the Dow is the most overbought in 117 years, but that may not be a bad thing

As the Dow Jones industrial average climbs to all-time highs, eclipsing the 23,000 milestone, one indicator shows the index is seeing one of its most overbought conditions since 1900.

The relative strength index, a classic momentum indicator in gauging whether a security is “overbought” or “oversold,” measures the speed and range of average gains and declines over a given period of time.

In this case, the 14-day relative strength index, which uses a scale of 0 to 100, comes in at just over 85 and near the top of “all observable daily [relative strength index] readings since 1900,” Craig Johnson, chief market technician at Piper Jaffray, wrote Thursday in an email to CNBC. Traditionally, a reading over 70 is considered “overbought,” and a reading below 30 is considered “oversold.”

While this measure is historically high and extended in the short term, Johnson said in an interview Thursday on CNBC’s “Trading Nation,” he remains quite bullish and sees further upside for the blue chips.

“When you come back and look at [the relative strength index] over a very long period of time, yes, this is a very high reading. It’s a similar reading to what you had back in ’15. Yeah, it is high. But in bull markets, you tend to get overbought and you stay overbought for extended periods. So given that the market is a little bit ahead of itself doesn’t surprise me. If we were to get a little bit of a pullback, it would be a great buying opportunity,” he said.

Some of his confidence in the index, despite its overbought indicator, comes from what each individual Dow component is doing. According to one of Johnson’s models that looks at the state of each Dow stock, he sees 20 Dow stocks in “bullish positions,” four that have reached their respective price objectives and six that are in bearish trends.

“When you wrap it all up, though, it suggests that this market still is going to make another leg higher,” over the next six to nine months, Johnson said.

Some aren’t as optimistic about the Dow’s direction. The index — which has gained nearly 18 percent this year — may soon face headwinds, said Larry McDonald, editor of the Bear Traps Report.

“Going forward, if we get tax reform, and if we get other things we are expecting from Washington, we are going to get a stronger dollar. That’s bad for the Dow … bad for companies with lots of international exposure,” he said Thursday on “Trading Nation.”

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