Chip stocks could plunge another 8 percent before hitting bottom, technician warns

Chips stocks are showing signs of life.

Advanced Micro Devices, Intel, Texas Instruments and Nvidia roared higher to begin the week, helping the SMH semiconductor ETF bounce back from the month's lows.

The rebound will be short-lived, says Ari Wald, head of technical analysis at Oppenheimer.

"We think there's a turn coming for the semis. Unfortunately, I think that turn is lower," Wald said on CNBC's "Trading Nation" on Monday. "This group has had a terrific run over the last two years. … For much of the several last recent quarters, it's been in the process of topping."

The SMH ETF nearly doubled from 2016 to 2017 before hitting turbulence this year. Over the past month, no SMH component has seen any gains, while some of its stocks, such as AMD, Microchip Technology and Applied Materials, have fallen by double-digits.

"You can see it in the ETF's 200-day moving average. That moving average is now taking a lower drift, so we think this group is likely to get worse before they get better. We see downside risk in this ETF to $88," said Wald.

A move to $88 represents an 8 percent drop from current levels, a decline that would sweep it 23 percent from its 52-week high set in March. The ETF has not traded at that price in more than a year.

However, Michael Binger, president of Gradient Investments, says recent sell-offs have been overdone and there is now opportunity to find some discounts.

"Two stocks I like here that have been beaten down to very low levels are Intel and Broadcom. I like these stocks because they produced a lot of cash, they have good balance sheets," Binger said on Monday's "Trading Nation." With Intel, "you get a good yield and it's cheap. … Broadcom I like a lot. I think it's a mispriced stock."

Intel has fallen 2 percent in the year to date, while Broadcom is down 11 percent. Intel is scheduled to report earnings on Thursday.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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