Transports Trade Set-Up

This is not the actual trade, it's the set-up to let the trade come to you at better prices, less risk and from what I see, pretty nice timing for a much larger move than we have already seen in transports weakness.

As far as playing the long side of the set up, the probabilities are there, the high probability/low risk is not. Letting the trade come to you and sticking with the highest probability outcome charts is the way I'd approach this, but to each their own.

Yesterday transports hit a 6+ month new closing low and managed to take out a bunch of stops which is why it should bounce now. Again, I feel it's a much safer, wiser trade to let transports come to you as a short set up than to try to play the bounce, but theoretically both could be done, the bounce trade is just much more risky with a much lower profit potential.

The lack of Dow Theory Confirmation between the Dow Industrials and Dow Transports is staggering.

Anyone who thinks at this point in the game that "This time it's different" and the market is going to keep doing what it's been doing because the F_E_D has their backs, is sorely mistaken. This has been an average length bull market (nothing special about that), it has received unprecedented assistance in the way of massive money creation, but the chart above is hard to argue with. Charles Dow would be calling his broker and going full short right now. If the goods America produces via the Industrials are doing so well, then why aren't the transports that ship them? That's essentially the logic behind confirmation or Dow Theory between the Industrials and Transports.

As to the charts and trade set-up...

 The preceding up trend (green to the left) which can't be seen on this chart was very clean and strong, but then gave the typical red flag earning signs in what looked like an apparent bullish move off the October lows, this was the peeling away from the long term average. Shortly after, Transports are in a large lateral top.

 The support candles that created the first support trendily can be seen at the white arrows, each one had higher volume than the preceding day (something we look for that makes a reversal candle 3-4 times more effective or reliable).  The yellow arrows are the first head fake move/stop run below the first support trendily and a bounce forming a new support line a little lower and that saw another stop run and its low became new support slightly lower. Yesterday in a 6+ month new low, a huge number of stops were hit/new shorts entered, in other words, massive supply at cheap levels which is the point of a head fake move as the new shorts can be squeezed and for a quick trade all of the shares can be accumulated without anyone wondering, "Who is on the other side of the trade absorbing all of these shares and why?"

Note the huge volume at yesterday's break below the latest support level.

 Here's a closer look as a bearish descending triangle broke down yesterday, these use to just keep going on the downside, but now Wall St. knows how technical traders will react, what they believe and they turn the trade against them if only for a brief time, using the concepts of technical analysis against traders. Again note the large volume on the break below support at the small white trend line.

You also have a pretty good idea where the upside target is by looking at the downtrend trend line of the descending triangle, but LLOOK FOR A POP ABOVE THAT TRENDLINE, IF WE DO GET IT, THAT IS LIKELY THE LAST BOUNCE IN THE AREA TRANSPORTS SEE. Rather they should see a rapid decline as a Crazy Ivan shakeout will be in place, already having shaken out new shorts yesterday below support on large volume, any new longs entering on a break above the trendline near the apex of the triangle will be caught in a bull trap as prices move lower and their eventual stop-losses will send transports even lower with more supply on the market.

 This is the 60 min chart, I marked the divergence areas, but the overall 3C trend has been deeply negative.

There is no positive divergence at yesterday's head fake.

 Even a 10 min chart is trending negative with no positive divergence at the stop run yesterday which is why I would not want to risk playing this one for the long bounce, there's not much support at all. This is the kind of trade (bounce) that can go very wrong very fast with a few words from a F_E_D speaker or some other unforeseen event unlike the sturdier divergences like the $USDX that fired and have done what we expected despite F_E_D news and other events, the divergences are strong enough to hold the trade together.

This 3 min chart of transports is about as good as it gets for a positive divergence at the lows and stop run of yesterday. I'd never enter a trade that's longer than intraday on nothing more than a 3 min chart with all of those other charts so overwhelmingly negative as they represent the highest probability resolution. Like I said when I decided to keep the gold/oil shorts in place, "When in doubt, trade with the highest probability signals".

If you are interested in the trade, I'd set price alerts around the upper trend line of the descending triangle and just above where it should be in several days or so. We'll take a look at the charts if and when it makes it there for the precise entry.