Crude oil futures have dropped about $17 since reaching a multiyear high of $115 a barrel May 2. The contract's year-long uptrend has been broken, with the current decline likely to reach a downside target between $85 and $90 in upcoming weeks. With this heavy burden lifted from U.S. industry and consumers, why hasn't the Dow Jones Transportation Average taken off like a rocket and posted new highs?

Energy and transportation often move in reverse lockstep, with one sector selling off while the other rallies. This is especially true in transportation sub-sectors, like airlines and trucking, which need tightly controlled fuel costs in order to make money. Given crude oil's recent pummeling, you'd expect that transports would be glowing bright green on trading screens right now. Instead, they're acting poorly, just like the broader market.

This unexpected weakness predicts two possible opposing scenarios: First, the crude oil decline reflects a general slackening of the U.S. economy, as alleged by many talking heads recently; or second, new margin requirements in the energy markets are forcing hedge funds to sell all sorts of equities, including the transports, to raise cash.

If this second scenario is true, it will be a temporary event that ends when the notorious risk-on trade finally washes out of the system and the funds reinvest capital in new strategies. In addition, this alternate explanation makes more sense than a slowing economy because falling energy prices will have a salubrious effect on consumer and industrial spending habits in the months ahead.

New York Harbor RBOB Gas Blendstone - Daily Source: eSignal

Consider the positive impact of unleaded gasoline futures on second- and third-quarter GDP. This contract fell a full $0.15 Monday, rounding out a four-day decline of $0.50. While other factors, such as seasonality and inventory, go into retail pump prices, this selloff will put billions of dollars back into the pockets of everyday folks and American businesses.

How low will unleaded gasoline futures go in the weeks ahead? Looking back, its uptrend started at the same time as crude oil, with the contract doubling in price between August 2010 and May of this year. A simple 50% retracement would drop the contract all the way down to $2.65, where support from the 200-day moving average currently resides.

In turn, that would drive pump prices below $3 in most locations this summer. Given this upcoming boost to economic activity, the current transportation decline should offer an excellent buying opportunity for investors and traders with strong stomachs and good market timing. Chart reading will aid this process tremendously by locating the price levels most likely to attract aggressive buying interest.

iShares Dow Jones Transportation Average Index Fund (IYT) - Daily Source: eSignal


DJ Transportation Average Index Fund

(IYT) - Get Report

topped out near $100 (red line) in May 2008 and sold off with other world markets. It bottomed near $40 in early 2009 and entered a strong recovery that reached the multiyear high about three weeks ago. The fund has been grinding sideways to lower since that time in a consolidation pattern that shows one test of the high and two sell swings.

The reversal at the 2008 high makes perfect sense because it's a major resistance level that can take several months to overcome. As a result, the short-term pattern could easily give way to even lower prices in a correction that breaks the 50-day moving average, currently at $96. Any decline should hold at or above the 2011 lows (blue line) in the upper eighties.

If capital rotates into the transports ahead of my technical schedule, I'd buy a breakout into the triple digits because that rally would lift the fund and index to an all-time high. Without overhead resistance, stocks and exchange-traded funds at all-time highs often run fast and hard, predicting a powerful uptrend that might gain 15% to 20% in a relatively short time frame.

Market players may choose to forgo buying the entire transportation index, instead focusing on sub-sectors that are likely to outperform in a more favorable energy-cost environment, While the airlines seem to fit this bill perfectly, high labor costs and high competition make this a relatively unattractive group, even if fuel costs plummet throughout 2011.

Instead, I recommend focusing capital on the packaging and trucking companies that could gain a twin boost through lower fuel costs and heavier loads, thanks to quickening industrial activity. DJ Transportation Average components


(FDX) - Get Report


J.B. Hunt Transport Services

(JBHT) - Get Report


Landstar System

(LSTR) - Get Report

make excellent choices in this regard.

J.B. Hunt Transport Services (JBHT) - Daily Source: eSignal

Arkansas-based J.B. Hunt broke out above its 2008 high at $40.25 (blue line) in December, entering a strong uptrend that hit a rally high at $48.36 in mid-April. It tested that level two weeks later and sold off in an orderly decline that reached its 50-day moving average earlier this week. The stock is currently sitting at that level, not showing its true intentions.

While the price could turn higher and head back to the rally high, a lower-risk entry will come if it continues lower and reaches major support at the December breakout near $40. That decline, if it happens, could take another one or two months. For now, just watch the bull flag (red lines) in place since the correction began last month, with a breakout signaling a short-term buy signal.

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At the time of publication, Farley had no positions in any of the stocks mentioned.

Alan Farley is a private trader and publisher of

Hard Right Edge

, a comprehensive resource for trader education, technical analysis, and short-term trading techniques. He is also the author of

The Daily Swing Trade

, a premium product from that outlines his charts and analysis. Farley has also been featured in





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. He has written two books:

The Master Swing Trader


The Master Swing Trader Toolkit: The Market Survival Guide

, due out in April. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.

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