July 8, 2008

Time and time again this year, we have seen major sell-offs followed by meaningless dead-cat bounces that only put off the inevitable. So the question is should we think any differently about today’s rally. Simply put – No. Oil has risen higher and faster than we ever thought possible, and yes, it has declined substantially this week, but to think the bulls are just going to give up on this run without so much of an effort to regain control is a foolish belief. Eventually the greed in oil will backfire, but it will take multiple failed efforts to drive oil prices higher before the bulls finally succumb. That’s why I believe that even though we may see follow through tomorrow and the days that follow, any such rally will ultimately be unsustainable, and when the speculators try to push oil higher, the markets will ultimately bring fear back into the heart Wall Street.

Take a look at the NASDAQ and S&P charts that follow, and you will see that despite the fact that the markets rallied today, the indices are still stuck in a downward channel. We will look to sell short any rally to the upper channel line.

Here’s the NASDAQ and S&P Charts…