June 16, 2008

Heading into today, no one was sure what to expect from Wall Street, as last week was filled with a volatile, see-saw action between the bulls and bears. But with oil spiking like it did early on, there was that feeling that we were staring at another potential 200-point day to the downside. But the markets managed to stabilize, and on the heels of news that the Saudis would increase oil production, oil dropped on fears of waning demand and the markets managed to break near even, with the NASDAQ leading the way.

The NASDAQ will likely continue to lead the way to the upside for the market, as tech stocks tend to be the least vulnerable to increases in oil prices (but not immune). The correlation between the market’s rally and oil’s decline was evident, and will continue to trade in that manner, until oil drops enough in price to where any dramatic movement thereafter is inconsequential.

The market’s rally from the past three days has us concerned, and leads us to believe that it is nothing more than a mere head-fake, poising itself for the next leg down. Though oil is very top-heavy and overbought in every sense of the word, it can nonetheless, run harder and further than one could imagine. Until the confirmation to sell oil presents itself, we have a hard time justifying the market being able to rally to the upside.

Here’s the NASDAQ and S&P Charts…