Trade Set-Up (longer Term ) IYT/Transports

First we had a post on 6/9, Transports / IYT Are Looking Horrible with a follow up and then a Trade Idea, set-uo, Trade Set-Up (Longer Term) IYT / Transports.

As it says above, I see this as a potential longer term candidate. I like the idea of a position (short) in transports as they move and adds some diversification, especially as the F_E_D (in my view, HAS to exit the market not only because of their balance sheet and the fact they have share-holders, but inflation and unemployment mandates have not only been met, but surpassed), which means it is very likely that these very rich multiples are going to come back to fundamentals , in short the economy and despite what the F_E_D says, we all know that the economy is not doing better with a Q1 2014 GDP print at -2%, one more consecutive negative print="RECESSION". The point is, as the Bernanke Put is removed, fundamentals will matter a lot more.

On the 9th at the exact top, Transports / IYT I had posted..

" I think IYT is in a very interesting spot to consider it. If you are a bit more cautious, maybe see if there's a bearish confirmation candle tomorrow, I think there's plenty of downside and this would be an excellent entry area even if you have to wait on a confirmation candle of today's possible/likely bearish reversal candle."

Too bad I didn't open a position right there, but the idea after that was because of the channel buster (trendline), there was a good chance of a second chance opening in IYT if we were patient and let the trade come to us, which it is doing, which is why I don't chase trades.

I'm going to go through multiple charts to give you a macro view of Transports...

 First a 5-day chart so you can see the character change in IYT, pre-2013 price action acted like it should, highs, lows, pullbacks, consolidations, corrections, basically the same as any normal stock would look. An important concept in volume analysis which hasn't mattered at all while the Bernanke put has been in place is "Rising price should see rising volume", however when you look at the move off the 2009 lows, volume does the exact opposite because this isn't real demand, this is a F_E_D induced sugar high in which prices move up on declining volume, AS THE F_E_D MOVES OUT OF THE BUSINESS OF MARKET MANIPULATION, YOU CAN COUNT ON THE LOST ART OF VOLUME ANALYSIS TO COME ROARING BACK.

The other thing that's noticeable is 2013 forward, this is exactly the kind of unbridled chase for yield that F_E_D policies have created with no respect for risk, I said it in a 5-part video series in 2007, "This market is going to end very badly, like 1929 style" and "At some point, the market is going to just take its medicine", that's point seems to be rapidly approaching and I would NOT want to be long a stock that looks like IYT /DJ-20 when the music stops and everyone scrambles for a chair.

I'll post some articles on volume analysis, it has been (until the F_E_D intervention) probably the second most important technical tool in your arsenal.

 I try to confirm as much as possible as you saw yesterday with the sector analysis ending with gold and silver miners, I had probably somewhere near 12 or more assets all confirming the exact same divergences.

This is one of the indicators I respect the most, MoneyStream by Don Worden who is the father of money flow indicators, he was selling them to Wall St. firms since the 1950's. Money Stream works like 3C, by divergence, higher prices should see higher MS readings, lower prices should see lower MS readings, we have a massive weekly negative divegrence in IYT, you may wonder why it looks so bad since 2009 while price moved up so much, the answer is right there in volume which didn't matter as long as Bernanke was printing and pushing that money in to the market via the mechanisms of QE and specifically POMO which are being tapered out of existence right now.

 The more recent action in MS on a daily chart is interesting because it follows the 3C trend and a concept we use often that we see over and over again...

3C daily trend, I'll show you what the concept is, but try to remember where MS and 3C fall off badly on daily charts.

 The concept is the ROC concept or "Rate of Change" in price. Nice steady trends tend to continue, but when we get a "seemingly" bullish increased rate of change as you can see on this trendline in yellow, it is a change in character that appears bullish , but it generally end up with a much more bearish event. These are also transition points between stages, like stage 2 mark up and then the increased ROC leading to a stage 3 top which was June 9th, note the "churning"-like green volume followed by a large red volume spike as several support areas are broken at once, you can see the trend line broken.

What we were looking for from here if you did not take the trade on 6/9 is a bounce, we have been looking for the same in several assets I'll cover, NFLX, AAPL, PCLN, etc.

There's also a horizontal trendline broken, right at the same area as the green churning volume. The yellow arrow is the bounce I talked about in  June 13th's, Trade Set-Up (Longer Term) IYT / Transports, it just took a little patience.


 Now remember the daily MS and 3C charts and where they fell off, look at this 4 hour chart showing again a break (leading negative divegrence) right as there's an increased upside ROC in price.

This is why I say a "Seemingly bullish" price acceleration.

The 60 min chart shows the same thing in both Dow-20 (Transports) and IYT (Transports ETF).

And the more detailed 5 min chart shows the 6/9 top and distribution in to it. We don't have any strong 5 min positive divergences so the bounce we are looking for should not be anything to fear shorting, we just want to get in at the best place to lower risk .

 Only a 3 min chart (not an institutional timeframe) has a small leading positive divergence at the downside reversal process area. So, I'd set some upside price alerts, that's what reminded me of IYT today, an alert, and we'll look for the exact entry, I suspect a bit higher.

Considering the big picture, I think if you were to hold IYT for 6 months or a year, any entry in this area would be fine and would look like semantics 6-12 months from now, in fact the thing we'd likely be thinking is "Why would we have waited , looking for the best entry and possibly missed the larger move?"

 Using  daily  Heiken Ashi Japanese Candlesticks, in white we have strong price performance, in yellow we have reversal areas, in red very weak price performance and again we have two reversal candles to the far right for a bounce-type move, the kind we are looking for and this is one of the reasons I believe an entry is likely a bit higher.

However, as I mentioned what we might think 6-12 months down the road, this weekly chart of Heiken Ashi Candlesticks shows a very clear, HUGE volume reversal candle to the downside (which as you know increases the effectiveness of a reversal candle by at least two-fold).

This might even be one to consider phasing in to, or you might take a look at the component stocks in the transport sector, I know FDX recently gave a sell signal on my Demark-inspired Custom Indicator scan and that has worked out pretty well so far.