Selling in the stock market is likely to take over again after last week's rally as oil prices approach 2008 highs, Fairlead's Katie Stockton says

• Selling in the stock market is poised to resume after the S&P 500 surged more than 7% last week.
• That's according to Katie Stockton of Fairlead Strategies, who sees limited upside remaining in the stock market's current relief rally.
• The expected declines come as oil prices approach the 2008 high of $147 per barrel, according to Stockton.

Selling in the stock market is set to resume and overpower buying pressure after last week's 7% rally in the S&P 500, which was the index's strongest week since April 2020.

That's according to Fairlead Strategies' Katie Stockton, who highlighted in a Tuesday note that upside in the stock market appears limited as the overall trend remains down.

Specifically, Stockton sees the falling 50-day moving average as a likely resistance zone for the S&P 500. That level currently stands at 4,270, which represents potential upside of just 3% from current levels. But to the downside, Stockton sees the potential for the S&P 500 to ultimately test support levels about 3,500, representing 15% downside.

"The McClellan Oscillator suggests that breadth has reached an overbought extreme as it did at the late March high. The indicator, which tends to produce timely indications of counter-trend high/lows, suggests that the rally will likely exhaust itself this week," Stockton said.

The McClellan Oscillator helps measure market breadth, or participation, and is derived from the difference between the number of advancing and declining stocks on a stock exchange.

The ongoing volatility in the stock market comes as oil prices remain well above $100 per barrel for WTI crude oil. Stockton expects these heightened levels to continue as long as WTI crude finishes this week above $115 per barrel. That would serve as confirmation of the recent breakout "and support additional upside," Stockton said. The benchmark US price traded as high as $119.98 per barrel on Tuesday.

Stockton ultimately sees oil prices likely testing their next and final resistance at the 2008 high, or about $147 per barrel. That represents potential upside of 26% from current levels, and would likely translate into even bigger gains for oil production and refiner companies.

It's not hard to imagine oil prices trending higher over the summer months, as travel demand increases and as supply shocks due to Russia's invasion against Ukraine continue.