Transports Long Shot Trade Set-Up

I'll be 100% upfront with you as not to waste your time, this trade set-up (potential for the trade to come to us on our terms, at the best entry or a better entry, less risk and the best timing) unfortunately doesn't look like a high probability, but there is a probability attached to it and as one of my favorite longer term / big picture trend shorts, I'c love to see the trade come to us  which is my favorite kind of trade.

If nothing else, I think the post is worth reading if you are already in Transports short or just for the concepts which are what I would call fractal, meaning they can be used in any timeframe with any asset, not just specific to transports, concepts for your trading tool box. Also there's a decent explanation of our "X-Over Screen" which can be used as a stand-alone trading system.

Right to the charts...

 First I want to know what the long term trend and highest probability forecast for the board market is as that's the highest probability direction for about 2/3rds of stocks. After that, unless there's an excellent reason to ignore this rule, I want my trades aligned with the market as that's the highest probability, path of least resistance. When I look at any asset for the first time, I want to look at the long term charts, usually starting with weekly like Transports above.

What I see is a clear, stable uptrend through 2013 and most of 2014 and then a significant change in character at the trendily break last October, "Changes in character lead to changes in trends", which this one did and the trend went from up to lateral which is often a tell-tale sign of a top after such a clear preceding uptrend,  thus transports are in line with the broad market.

 On a daily chart there are two support areas, the first is broken and triggers a large stop run at the first red arrow (to the left), note the increased volume. A new support zone forms just below and that sees a stop run as technical traders are incredibly predictable, placing stops right blow obvious "support" levels. As you know I've been hoping to get a decent bounce from transports locally for a 3rd long term short entry. If you look at the longer term charts above, I'm really not very concerned that a bounce in transports is going to change the big picture outlook for them, thus ?I want to use price strength to sell/short in to. I can easily determine this with the 3 charts above without even glancing at 3C.

 My "X-Over Screen" can be used as a trading system in and of itself with entries, signals to tell you whether holding is in your best interest and when a change has occurred and the trade is over. There's even ways to use the system to determine where corrections will likely move to.

Above is a long term trend setting on a 3-day chart. The price window 10 and 22 bar (yellow and blue) moving averages are used as part of the system, but moving average systems are notorious for whiplash or false signals. This is dealt with by adding additional conditions. In the middle window is a custom indicator in yellow, it represents a series of conditions that must be met and a 22-bar (blue) moving average is applied to the custom indicator.

Finally you can use RSI as seen above or the Ultimate Oscillator for the 3rd/bottom window. A long signal is given when the yellow (shorter) price moving average crosses above or below the longer 22-bar (blue ) moving average. In addition, the custom indicator in the middle window (yellow) must either be giving the same signal in the area and RSI or the U.O. (period 14) must be ABOVE (for a long) or below (for a short) the mid-line or what would be 50 for RSI (Wilder's).

At the three white boxes to the far left, all 3 conditions are met, it takes all 3 conditions to reverse to produce a sell signal. 

Even on a longer term 3-day chart (making the price moving averages 30 and 66 day) you'll see numerous whiplash or false cross-udders through the trend above, a normal moving average crossover system would have taken you out of the trade at a 21% gain, whereas this system would have taken you out at a 71% gain. There are other tools we can and do use to get a better exit, but for a tend system, it's not bad.

Note that all 3 conditions have to be met for a sell signal and the middle window custom indicator never once went below its moving average until all 3 did at the red boxes. All 3 are clearly red now meaning not only a sell signal, but it can be used as a short signal as well with the same 3 conditions needing to be met before the short needs to be covered, allowing you to better capture a longer trend.

 As for the Daily 3C chart, remember the 4 stages of a stock's/asset's cycle: Stage 1: Accumulation/Base; Stage 2: Mark-Up/Participation/Rally; Stage 3: Distribution/Top and Stage 4: Decline. These 4 stages layout over and over on all timeframes from a long term multi-year chart like this to a 1-week swing move or a 3 month head fake such as we saw around April culminating with stage 3 in May and stage 4 in June.

Just like survival in a rain forest or desert, you need to know where you are to know where you are likely going. This can often be determined by price action alone, but I prefer to use as much confirmation as possible.

A stage 1 base is often flat or slightly "U" shaped or "W" shaped, but the overall trend is lateral/sideways as you see to the far left in Transports daily 3C chart (one of the strongest timeframes we use). You can easily see the 3C leading positive divergence/accumulation at the flat stage 1 base in white.

Stage 2 mark-up is a breakout above the base area that not only holds, but follows through and 3C should confirm. Typically before a transition to stage 3 top there will be some change of character in price such as peeling away from the long term trend with a "bullish looking" upside move or in this case a severe break of the long term trend line. This tells you the probabilities are very high a change in trend will soon occur as it did above going from up to sideways with a clear 3C negative divergence/distribution. Stage 4 is simply what we'd call a bear market, there's often an increase in volatility in the top's price just before the transition, similar to what we are seeing this week.  In fact there's usually an increase in volatility between all transitions from one stage to the next.

The daily 3C chart is in a deep leading negative divergence.

 As for Dow Theory which is also nearly a century old, it still makes sense. If the Dow 30 (Industrials) or the producers of products are doing well, shouldn't the shopping companies that must move these products ad goods to market? As you can see between Industrials (Dow -30 in green)  and Transports (Dow-20 light blue),  my custom histogram show how Transports were a momentum play and outperformed the Industrials for some time (the red histogram above the middle or zero mark) and you can see when this started to change,  MAJOR RED FLAG FOR ANY PROPONENT OF DOW THEORY  which to me is simple common sense.

 This may be the biggest reason I even post this, a 60 min 3C positive divergence at a "W" bottom.  I've been hoping we get another shot at transports for members who may not have had the opportunity to get involved at the last 2 entries.

This is the strongest reason for this post, thus if you are interested in the trade coming to us, I'd set IYT price alerts above $153.50 which would be the minimum move required to consider a Transports short and I'd continue to set price alerts above at intervals of your choosing from $153.50 to roughly $161. Although unlikely, a well worthwhile little bit of effort for a fantastic trade set up should we get lucky.

The 30 min 3C chart is also showing a positive divergence at the second low of a "W" price pattern or base. The breakout would be above 4153,50. If you are using the Dow-20 (Transports), look for similar areas above resistance trendiness and above the deciding triangle from 4/23 to 5/19- 5/20.

the much more detailed 3 min chart shows a number of smaller divergences, the "Steering" divergences which send price lower to be accumulated when it gets too high without giving up a lot of shares , etc. So far this chart isn't fantastic, but has the ability to make the move I'd like to see.

Being realistic about this , which is why I posted the warning at the top of the post...

The intraday charts in IYT and/or Dow-20 are not looking great such as this 2 min suggesting near term trade is more likely to falter than move higher.

And the 1 min intraday chart of Dow-20, not looking good at all. However the 30-60 min charts are much stronger signals so they still carry some hope that we get this opportunity, which is why it is posted here today being one of my favorite longer term trending trades.

Good luck. If you have any interest at all, spend the few minutes and set the upside price alerts.