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Markets: 'The long-term context is still bearish', strategist explains

Fairlead Strategies Founder Katie Stockton joins Yahoo Finance Live to discuss the recent market rally and commodity prices.

Video transcript

- All right. Let's break down the broader market action that we're seeing play out today. For that, we want to bring in Katie Stockton, Fairlead Strategies founder. Katie, it's great to see you. Let's start with the S&P because we're not seeing too much movement today. But the S&P is trading above its 50-day moving average. I know you keep a very close eye on the technicals of this. What does that tell you?

KATIE STOCKTON: Well, positive short-term momentum has lifted the major indices. And so it doesn't differentiate this rally necessarily as either a bear market rally or a bullish reversal, however. So we want to make sure we have a long-term context within which we're viewing this strength.

And, unfortunately, that long-term context for us is still bearish looking at gauges that we use on the monthly bar charts, things like the long-term moving averages, even the 200-day moving average pointing lower. So that tells us that the primary trend is still lower even despite this nice up move that we've seen. And with that in mind, we'd be really wary of any kind of downtick in the momentum gauges that we have on the daily chart. So that's what we're watching here going forward.

- When you look at that move upward, what's the real outlier? What surprises you the most about the dynamic right now?

KATIE STOCKTON: When I look at the what? I'm sorry. I missed that.

- That upward move we just discussed.

KATIE STOCKTON: Right. The upward move, it does have good momentum. It does have good breadth. What would differentiate it from a very important long-term low is something that we would see from partly a bottom-up perspective, looking at the individual stocks that comprise the major indices. Those individual stocks, if we started to see a lot of breakouts across the board that seemed to have some staying power, that would be one encouraging factor.

But also because the long-term momentum is to the downside such that we haven't really seen that since 2008, we want to make sure that there's some kind of bottoming process. We don't think this is something that can end in a V bottom type of fashion with the June low being the last low of the bear market cycle. We think there will be some kind of retest and that that's important as the market sort of absorbs a long-term oversold reading.

What we found is that during these bear market cycles, the first long-term oversold reading often isn't the last. We see these oversold readings maintained a bit longer than we're accustomed to in corrections. So we're respecting that as something that is a process, not a turning point in time.

- Katie, you see support for the SPX near 3815. You also say that that level looks in jeopardy in the back of this relief rally, what you were just telling us. I guess how much lower could we potentially go if we do break below that number?

That 3815 level, I think it's fairly widely followed. It's a Fibonacci retracement level, something that the technicians like to have on their radar. And it is an important level. It was something that served as the footing for this rally in part. But if it were to be broken-- and by broken, we mean decisively a couple of weeks below-- then, unfortunately, the next support level is around 3,500.

But the secondary support level would become 3,200. And that level would be targeted by those Fibonacci retracement levels. So with a breakdown below 3815, that would then target about 3,200 based on next support. But between here and there, we would always adhere to those momentum gauges, looking at things like those long-term oversold readings and watching for any kind of positive divergences that were to arise in combination with the important levels.

- Record profits for big oil in the quarter have been followed by plummeting prices there. WTI falls another 3% to 86 today. Brent down another 3%. Will that stick?

KATIE STOCKTON: The corrective phase in crude oil-- we've see in a corrective phase, actually, more than just in crude oil and some other commodity prices-- it does still appear within the context of a long-term uptrend. And there's not many of those out there in the marketplace right now. Long-term uptrends are really limited right now, on the equity front at least, to the energy sector, to the utility sector. And of course, crude oil with its long-term option is still a driver of that.

So crude oil to us has support essentially in line. And there are some oversold buy signals that have higher conviction than something that's in a downtrend. So we're looking for at least a relief rally. But there is a loss of long-term upside momentum that suggests that we're not going to see what we saw prior to this correction probably anytime soon. Maybe more of a neutral environment unfolds over the next few months.

- Katie, that neutral environment, what does that look like? Are we going to hover right around $100 a barrel? I guess where does that shake out in your view?

KATIE STOCKTON: Well, I've been calling for a lower high versus June. I don't have great conviction as to where that lower high would come from. For that, we're going to adhere to our short-term momentum gauges, which we are looking to see improve here. And that relief rally might be a selling opportunity just to avoid that more sideways price action in crude oil or selected energy stocks.

So that's our sort of mindset as we watch this sort of correction mature. And then in terms of the level where it could find its footing, like I said, there is support essentially in line. So perhaps there's a floor in the mid 80s to low 90s or something of that nature. And even holding in there would still likely hold that long-term uptrend. It just wouldn't be that actionable over those months.