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Dow transports could soon be in ‘jeopardy,’ and it could spell trouble for stocks, says trader

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Trader says the transports are in trouble

The Dow transports-tracking ETF (IYT) has fallen more than 3 percent in the last month, and TradingAnalysis.com founder Todd Gordon says there are troubling signs that it could fall below a key level.

“We’re seeing some underperformance in the transports relative to the broader market as a result of the escalating tension with trade tariffs with China,” he said Tuesday on CNBC’s “Trading Nation.” “I’d like to take this opportunity to be short IYT.”

  • Gordon is referring to an uptrend that has been in place for IYT since late 2017. According to Gordon, if IYT breaks below the uptrend line, the transports “will be in jeopardy” and could fall to $180.
  • As a result, he wants to buy the August monthly 185-strike put and pair that with the sale of the August monthly 180-strike put, which expires Aug. 17 and costs Gordon about $138 per options spread, as he pays $1.38 total.
  • If IYT closes below $180 on Aug. 17 expiration, then Gordon could make up to $362 in reward. But if IYT closes above $185 on the expiration date, he could lose the $138 he paid to put on the trade.

Dow Theorists often look to the transports as confirmation of the market’s general direction.

The trade: Gordon is suggesting buying the August monthly 185/180 put spread for about $1.38, or $138 per options spread.

Bottom line: Gordon sees IYT falling below $180 on Aug. 17 expiration.