A Dow Theory 'sell' sign has the market nervous

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Why the Dow theory is important

Traders on Tuesday were ready to shake off the detritus of Monday's market plunge with a follow-up rally, but some worried the good times won't last.

Those who follow Dow Theory, which uses the transportation and industrial indexes to gauge the strength and weakness of market moves, sent an ominous "sell" signal during the previous day's carnage. Both measures closed below their previous lows back in October, setting up a possibly dangerous scenario ahead.

Jeff Saut, the generally bullish chief investment strategist at Raymond James, said in his morning note to clients Tuesday that he believes Monday's movement put in a near-term market bottom, but one that may not last.

"While we were looking for a bottom today/yesterday, the quality of any ensuing rally will be VERY important to reverse yesterday's Dow Theory sell signal," Saut wrote. "Hopefully it will be a false sell signal like the one of May 2010. But, until it is reversed, I am going to be much more cautious than I have been over the past 6.5 years, even though I think we are going to get a near-term rally off of yesterday's lows."