The Charts Turn Ugly: "We’re Right In The Zone Where This Surge Should Run Out Of Steam"

As optimism over global trade (unclear why as there have been no actual positive news overnight, and on the contrary China's Foreign Ministry spokesman, Geng Shuang, said that "if the United States only wants to escalate trade frictions, we will resolutely respond and fight to the end") helps propel the S&P to day 6 of its longest rally in a year (and the Dow on day 7), some strategists are getting nervous.

While all of the major U.S. averages closed in positive territory yesterday, they ended the day well off their intraday peaks on a day that was most notable for its mediocre breadth and extremely light volume. i.e. – a continuation of what we’ve seen over the past few trading sessions according to Russ Visch.

Always the contrarian, instead of expecting further strength in the market, the bearish BMO technician who last week predicted that a retest of the December lows now appears inevitable, Visch reminds his clients that the short covering rallies that occurred last Fall averaged 7 sessions with an average trough-to-peak gain of 7.28% "so if that’s any guide we’re right in the zone where this latest surge should begin to run out of steam."

Another reason why Visch thinks its time to cash in the chips, no pun intended: "Chart-wise it makes a lot of sense too since both the S&P 500 and S&P/TSX Composite appear to have stalled at overhead resistance levels yesterday."

Finally, one other technical hint that the S&P has now gotten way ahead of itself is the following chart from Bloomberg's Ye Xie, according to which the rally in chip stocks is now way overextended is that the SOX semiconductor index has gained more than 10% since the start of June, meanwhile the latest news out of South Korea showed that semiconductor exports in the first 10 days of this month were down 31% from last year.

"Since export data tend to track the performance of the Philadelphia Semiconductor Index fairly closely, the recent divergence is becoming too big to ignore."