Dow Transports Defined Risk Short Setup

As stock’s cratered into the end of the month of May last Friday afternoon, plenty of sectors, groups, and individual stocks left nasty bearish reversals behind on their daily charts.  One group of stocks that I have been eying for several months not to exhibit shortable weakness is the Dow Transportation stocks as represented by the iShares Dow Jones Transportation Index Fund (IYT).

On the longer-term chart below, the transports completed an important breakout in January, past significant multi-year resistance around the $99 – $101 area.  The breakout happened as the group began a steep rally off the November 2012 lows, which first led to a break out past a medium-term consolidation period, and ultimately past multi-year resistance.  To be sure however, the rally off the November lows was steep as it lifted the group by 30% over the course of six months, into mid May 2013.

IYT multi year

As Fed Chief Ben Bernanke gave his latest testimony on May 22nd and the broader market came off its highs, so too did the iShares Dow Jones Transportation Index Fund (IYT) with a clearly visible bearish candle.  Given the still strong trend that was intact however, it was at the time to yours truly somewhat premature to lean against the short side of this exchange traded fund.  With last Friday’s confirmation selling below a first line of support near $113 however, the group now looks vulnerable for at least another 2.50% – 4.50% of downside in the near term.

More specifically, the 61.80% retracement of the move off the April 15th lows, the latest up-swing, near $109.60 offers an interesting first target to me, while a second support level sits near $107.50.

Looking at come of the components of the  iShares Dow Jones Transportation Index Fund (IYT), some of its top holdings like Kansas City Southern (KSU) and Union Pacific Corp (UNP) are looking just as vulnerable for further downside.

IYT daily chart



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