The current stock rally will likely fade and investors should be prepared for the bear market to continue, Fairlead's Katie Stockton says

• The stock market's rally off its June lows will fizzle out, according to Fairlead Strategies' Katie Stockton.
• Stockton said long-term indicators are still in negative territory and that the bear market is likely to continue.
• "We would not chase the rally, noting short-term overbought conditions have returned," Stockton said.

The S&P 500's 9% rally off its June lows to just above 3,600 is nothing more than a bear market rally, and investors should resist the urge to chase it by buying more stocks, according to Fairlead Strategies' Katie Stockton.

The technical analyst said in a note to clients on Wednesday that while the S&P 500 and Nasdaq 100 did reclaim their 50-day moving averages on Tuesday, longer-term trends remain negative, suggesting that the bear market will continue.

The stock market is "trying to push out of its consolidation phase. We believe however that this is just a bear market rally and that it will soon fade," Stockton said, highlighting that short-term overbought conditions have already materialized in stocks.

At the same time, volatility measures are oversold as the VIX approaches support near the 24 level, so investors should expect an increase in volatility into the end of July. Such a spike in volatility would likely not be a surprise to investors, given that the Fed will meet next week to raise interest rates by an expected 75 basis points, and as mega-cap tech companies report earnings.

"Bear market rallies are often fast and furious, making them difficult to capture on the long side," Stockton said.

She observed current S&P 500 support at 3,815, with downside support down at 3,200 if the market downtrend advances. Those support levels represent potential downside of 3% and 19% from Wednesday afternoon prices, respectively.

One reason Stockton expects the sell-off to continue is because of her observance that "more and more stocks [are] somewhat short-term overbought within the context of their downtrends." Those stocks can mostly be found in the semiconductor and homebuilder sectors.

At the same time, stocks in the energy sector, which performed remarkably well while the rest of the stock market tanked, are running into long-term support levels, giving Stockton confidence to upgrade the sector. But for the rest of the market, Stockton isn't positive.

"We would not chase the rally, noting short-term overbought conditions have returned," Stockton said.