Transports Trade Set-Up / IYT

Taking a quick look at some airlines and the Dow US Airlines Index, I don't think these have seen anything resembling their bounce, but they do look like they ar preparing for one which makes Transports, a core short I've held open for some time and continue to do so , it's at a -7% loss, but considering how volatile transports can be, how volatile tops can be, it's really not bad draw down. I would consider adding and for those interested in a potential new short position in transports, I'd be setting upside price alerts similar to what we are doing in AAPL. If the trade comes to us on our terms with a better short entry, less risk and a clear skew in probabilities, I see no reason not to take on Transports short.

I believe in the position and have kept it open even at 7% draw down because of the charts and how it has behaved and the changes in its behavior.Again this really hasn't moved much so I think there's a good chance we get a shot at this one with a trade that comes to us.

 First the trend line at #1 was already on the chart. This is an example of an asset that we saw a positive divegrence in, knew it was going higher (along with the broader market that was also showing positive divergences, thus our forecast for a face ripping rally). I could have closed IYT short at that point at a gain, but as a core short position, with what's coming, it wasn't worth trying to trade around this one and potentially miss the AAPL moment.

The trendline at #1 was drawn for a previous post showing the concept of "Wherever you see the first 3C divegrence, price will surpass that". Said more plainly, when the first positive divegrence in IYT was seen, had I bought it at that time (at the red trendline), I could expect price to move at least to that area and 90+% of the time, significantly higher.

The second trendline shows where the Trend Channel had a daily (on the close) stop out for this trend, as you can see it has been hit.

For those of you who know about my Trend Channel which was the first custom indicator I won an award for, it is a objective way of deciding when to get out. Far too many times I have been in trades and had a nice gain and exited only to see that gain doubled or worse. The Trend Channel is not like an envelope channel or Bollinger bands which have pre-determined settings that may or may not have anything to do with the volatility, Beta and character of the stock that the channels are set to track.

The Trend Channel reacts specifically to the individual asset it is applied to, determines what is "normal" price action, volatility, consolidations, etc and then sets an average of the norm and surrounds price with a multiple standard deviation (the channel), a break (in this case) below that standard deviation or the highest point of the lower trend line is a stop out telling us something significant has changed in the character of the stock by a measure of standard deviations above and beyond normal.

This allows the Trend Channel to follow a long term trend, allow the stock to consolidate without stopping it out, which envelope channels can't do,  as the channel is reacting in real time to the most recent changes in trends and behavior. Thus you'll never stop out at the highs, but when you do get a stop out, the easy money of the trend has been made. Often there's additional volatility in a wide, choppy range and if you're lucky you might get a better exit, but usually by a percentage that is so small it's not worth the risk in such a choppy , volatile environment that often reverses to the downside unexpectedly and quickly starting a new trend.

So after the initial stop out as Transports have done for this trend, there's some additional volatility most of the time (the reversal process) and that can be used to enter positions just like AAPL. If Trannies make a move higher after already having given a stop and they show distribution in to that move, that's the highest probability, lowest risk and best entry...the same as what we are looking at with AAPL.

 Much like BABA, Transports have seen a Channel Buster as well. Channel Busters come in a few variations, but the initial break BELOW the channel almost always tells us we'll see a move back ABOVE the channel (as volatility increases and we no longer are trading in the channel).

The most common resolution in this scenario before we even consider anything else in trannies is that the move ABOVE the Channel will lead to a sharp decline back below and start a down trend, which is what we have been trying to determine in BABA since we called its Channel Buster which had a target that was hit , predicted 2 weeks in advance as well as the pullback which started the next day after a strong +4% gain on the day the post was released.

 The long term 2 hour 3C chart is one of several reasons I consider this a long term core short. The up trend at the green arrow saw 3C confirmation agreeing with the move higher and that it would continue until there was a change in the upside rate of change in price (just like BABA) at the orange arrow which was a red flag and warning that the trend was soon to change.

Then we had a spate of numerous negative divergences, on this long term chart you can see the most recent rally has the deepest leading negative divegrence, much stronger than the last divegrence that sent IYT lower and put our position at a decent gain.

 The 60 min chart has much more detail and we relied on this early on. Note the negative to the left at a head fake high (yellow arrow) which is a failed breakout in this case, causing significant downside momentum as it creates a bull trap.

The accumulation I mentioned from the first chart above can be seen in white and the distribution in to the trend is quite clear , especially around the area of recent downside volatility.

 The 15 min chart shows a strong negative divegrence right in to the gap up, almost immediate distribution sending IYT lower and since it has not put in a divergence that has reached this far out, thus I don't see a big  or long lasting bounce and in context of the daily chart and core position, I think you could enter here and a bounce wouldn't change anything and 6 months from now you
'd be very happy you did, probably not even being able to discern the potential bounce we are considering right now.

In other words, when viewing the forrest rather than the trees, IYT is already in a great area, a little help with a better tactical entry probably won't be worth missing the trade potentially, but I believe with price alerts we can probably get a better entry and if not, there are lots of other trades.

The most significant thing about the 15 min chart is the strength of the negative divegrence and the total lack of any positive divegrence on a 15 min chart, which doesn't mean that there isn't any positive divegrence, just not anything strong that concerns me with the open IYT short.

 You have to move to 1-3 min intraday charts to see the positive divegrence, again along the lines of an oversold bounce and near term transports are certainly oversold.

This 1 min chart doesn't show any negative activity intraday so I suspect a bounce in trannies is coming. I'm setting price alerts from $164 to the $168 area and will be looking for an excellent high probability, low risk entry as the trade either comes to us or we move on to something else.