The ETF Dow Theorists Should Watch in November

IYT could rally in November, but potential roadblocks are hovering just overhead

by Bernie Schaeffer

Published on Nov 5, 2019 at 8:14 AM
Updated on Nov 5, 2019 at 8:14 AM

At one point last week, the Dow Jones Transportation Average (DJT) was sitting on an October gain of more than 4%, as the outperformance of the transportation sector had sparked optimism among “Dow Theory” followers. However, a mid-week round of discouraging earnings reports from the sector effectively rained on the transport index’s parade, dropping its monthly gain to just 1.3% by Thursday’s close. As such, the iShares Transportation Average ETF (BATS:IYT) also pulled back from a familiar area of resistance, and it is to this end we decided to dive into the exchange-traded fund (ETF) for this week’s featured chart.

From a historical standpoint, all may not be lost for Dow Theorists. IYT has been the ETF to own in the month of November, looking back 10 years. Specifically, the fund has averaged a healthy monthly gain of 4.72% -- topping all but one ETF return on our list – and is one of just four ETFs to have settled November higher 90% of the time, per data from our Senior Quantitative Analyst Rocky White. However, while the transports fund has history on its side, a meaningful bounce would require IYT rallying through a familiar area of “congestion.”

Last Monday, Oct. 28, the ETF closed just shy of $195; run-ups to this area have, for the most part, acted as “sell” signals in the second half of 2019. Following the latest brush with the region, in fact, IYT subsequently went on a four-day losing streak -- the longest since mid-September, which marked the fund’s previous test of this formidable hurdle.

Beyond that, the ETF could once again stall in the $200 area. Not only does this region represent “round-number resistance,” but it’s also home to IYT’s annual high, touched April 24. In addition, the $198 area represents a 20% year-to-date gain for the shares.

And while absolute open interest is light compared to some other funds, it’s worth mentioning that the 190 strike is one options traders are watching. The November 190 put, in fact, is home to peak open interest across all series, with more than 3,300 contracts outstanding. We are also keeping close tabs on the $189 level, which represents a 61.8% Fibonacci retracement of IYT’s September 2018 record high of $209.43 and its December 2018 two-year low of $155.24.

As for potential support in the short term, the $186 neighborhood houses the ETF’s 50-day and 200-day moving averages, which are on the verge of a “golden cross” (typically viewed as an indicator for upside price momentum), after making a “death cross” (typically viewed as an ominous technical indicator) in early October. The last time these trendlines made a golden cross was in late April, coinciding with the transport fund’s all-time acme.

Beneath that, the $181-$182 area represents a 50% Fibonacci retracement of the aforementioned high and low, and a 10% year-to-date gain for IYT. It’s also where the shares were trading prior to an Oct. 11 bull gap. And if those levels don’t contain a steeper pullback for the ETF, there’s always the relatively reliable $175 price point, which has rather neatly contained retreats in 2019, and represents a 38.2% Fibonacci retracement.

In conclusion, recent history suggests IYT could rally back in November. In fact, another 4.72% bounce from Friday’s close would put the ETF above $201. However, in order to do that, the shares would need to take out a few familiar roadblocks. Should the transportation fund resume its recent retreat, though, downside could be limited, as it has been so far in 2019.

IYT Nov 1 COW chart


Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 3.


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