Securities Research Services

Thursday, July 17, 2008

Tradable Rally Developing?

Buyers clearly took control of the tape yesterday as oil followed through lower. Now the big question is, is this the start of a tradable rally or just another big up day destined to get faded like the big up days on July 1 and July 8?

The answer to that question very likely rests with oil. USO pulled back to its rising trend and tagged its 50-day average yesterday. If oil follows through lower, we suspect that buyers will remain in control of the market for a few more days. If not, then this rally is likely to get faded very quickly.

Also keep in mind that we are in the middle of peak earnings season. The market is likely to move based on guidance of the major companies that make the headlines. Today a whole slew of companies report.

The bottom line is we need a follow through day before we can start to think about recommending long positions in this market. A follow through day lower for USO and a follow through day higher for the SPY would go a long way toward giving this market better set ups on the long side.

That said, keep in mind that this market is in a primary downtrend. Sentiment readings are no where near extreme levels that mark bottoms. Any trades to the upside must be quickly sold into because the likelihood of another stab lower after a brief rally is very likely. SPY $116 remains in play. In our opinion the strongest play in this market is to wait for the market to bounce a bit and then start looking for failures to short once again.

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