Chip stocks have gone from hot, to not, to hot again. TradingAnalysis.com founder Todd Gordon says the group is on the verge of a major breakout.
"From a technical point of view, the [chips are] just in consolidation, waiting for the next leg up," he said Thursday on CNBC's "Trading Nation."
On a chart of the SMH, the ETF that tracks chip stocks, Gordon notes the formation of an Elliott Wave triangle. This pattern of repetitive trading normally signals that a stock is about to move in the direction of trading prior to an Elliott Wave consolidation, Gordon said.
As a result, Gordon thinks that SMH will break out and rally higher, as chip stocks had seen a big rally that lasted from April 2017 until early February.
To play for a breakout, Gordon likes a call butterfly spread. In this strategy, Gordon is going to buy the October monthly 105-strike call, sell two of the October monthly 110-strike calls and then buy the October monthly 115-strike call. Altogether, the trade costs Gordon $1.33 total, or $133 for the spread.
In this particular trade, Gordon is targeting that middle strike of $110 for the SMH, which closed above $105 on Thursday.