Although no two market cycles are the same, there are clear parallels from a technical perspective between where the Dow Jones is currently located compared to the situation in 2007 (and 1999) - i.e at the same overbought levels on a RSI basis, and at the upper end of trend channels. Therefore, the Dow is currently located in a critical technical phase given what followed the previous times when it was similarly positioned. The Dow is now located at the most overbought level on a momentum / RSI basis since 2007, and is at those same overbought levels, which is reason for caution relating to the sustainability of the current rally. Again the index was similarly positioned in 1999 (as highlighted by red arrows on chart below). However, it does need to be emphasised that the RSI is not a timing or turning point indicator - it flags overbought situations, but does not provide an indication of when this overbought situation is likely to correct. A technical top formation is the requirement to indicate that the corrective phase has commenced and to generate a technical sell signal, The coming days are shaping up as being significant in terms of whether the potential emerges for a technical top.
In a market where bottom up investors have struggled to deliver outperformance, momentum models (like technical analysis) have allowed investors to better time the entry and exit points. I found that an integrated multi-style approach (i.e. including momentum) seems to smooth out big swings in the market. The macro risk in global trade and Euro issues may be the catalyst that drives the profit taking.
I agree with you Mathan. By far the most common way my technical analysis model is used is in combination with fundamental analysis, rather than in isolation. The technicals are a "timing tool" and useful in identifying turning points in momentum / sentiment (which is really what technicals are analysing), particularly when it has moved to an extreme. There are times when fundamentals are not the key driver of share price or market performance, and it is in those situations that technicals are particularly useful. By way of illustration of how the technicals have been effective on the "timing"side, during last year major market turning points were identified - the upward reversal point in US bond yields in August 2016 (at a then yield of 1.58%) and the buy signals on the key European stockmarkets in mid-July 2016.
In a tough market, timing is everything...good call. S&P 500 had the first fall over 1% since Oct 2016.