Ok, tried it on my test site and got it to work. The trick is not to select your custom post type (leave as post) in the blog module but just select the category you want to display from your custom post type. That function is changing the query to set the custom post type slug into the query for you.
However the problem that you will have is now you cannot select the categories of normal posts. You would need to add in additional functions to target a specific page and/or template.