IYT / DJ-20 Transports Follow Up

Our short in IYT is still at a gain and I consider it a longer term position trade so I'm not too concerned about any short term bounces, but it is something we looked at. Last Wednesday after quite a few USO posts I posted USO Bounce. As I said then, it's not my favorite trade by a long shot, but it should relieve some pressure on the recent break from a bearish ascending wedge in Transports (IYT short) and thus Friday had posted Transports To Bounce which are now up almost 3% since Thursday's close.

I don't see this bounce as a threat to the IYT short, but it may make for a good second chance short opportunity or an add-to which I left some room to add to on a bounce. Here are the charts, both shorter term (bounce) and longer term trend, you'll probably agree that you'd much rather be on the longer term short side of things.

First USO's bounce...

 USO trading mostly in line at the green arrows and a positive divegrence to the right for a bounce. This wouldn't be unusual in a trend, but this does look a little stronger than the typical bounce/correction as the 60 min chart shows no other divergences until this one meaning this is the strongest to show up on this chart's timeframe.

 Looking at the bigger picture in USO, there was a larger "W" shaped base late last year/early this year leading to the rally that proceeded it until that hit distribution/stage 3 and decline / stage 4. I suspect the longer term view for oil is to the downside, however with all of the dynamics of the market alone not to mention the middle east geo-political situations, obviously we don't want to just sit on our laurels and assume this stays a constant. On the other hand global growth/economics do make a compelling case for lower energy demand.

Transports...

 This is IYT's bearish Ascending Wedge. From a risk/reward P.O.V. I want to short this as close as I can to the break above the wedge  (yellow box), we entered at the yellow arrow which gives us some room with a longer term position. The break below support of the wedge is where the technical crowd will jump in short and just like any other top like a H&S, the initial shorts almost always get shaken out. I'd guess most of their stops are right around the lower trend line or the $150 area which is a psychological magnet any way so I'd think we see at least $150 before IYT starts to roll over and that's where I'd want to add the rest of the short or for anyone interested in a new short, that would be an area of interest.

 This is the 15 min positive divegrence, notice it looks a lot like many of the market averages or Industry groups, this is because the market largely moves together. The single greatest directional force on any given stock is the broad market's direction which is responsible for about 2/3rd of the movement in individual stocks so check out the market before you go stock picking.

This divergence is strong enough to easily hit $150 and probably some.

However, with a longer term position trade I'm interested in the longer term probabilities and since IYT isn't going to cause any massive draw-down from our entry or have any theta decay issues, I'm fine with just sitting on this one and stick with longer term probabilities.

 Our Custom X-Over Channel stayed long from the long signal to the left with the 3 white boxes and turned to a sell/short signal at the 3 red boxes so it's fairly new.

As for the Trend Channel, there was an increased ROC in price to the upside (as there normally is just before a trend change) so the Trend Channel that holds the 2014 increased ROC already stopped out, this larger 4-day channel that holds the entire trend since 2013 is still officially long, but just missed the stop by about a point which is now $143.88 on a 4-day chart closing basis.

This however is where the highest probabilities are, this is a 4 hour 3C chart that was in line on the uptrend and went to a strong leading negative divegrence very quickly, I remember commenting on how fast distribution set in here and how strong, unlike most assets. So I want my longer term positions aligned with the highest probabilities which are clearly to the downside despite a near term bounce. In fact that near term bounce is useful as a short entry to lower risk and give you a better entry or add-to.