Chip stocks are getting crushed ahead of AMD earnings — here's what to watch

Semi stocks got crushed on Wednesday ahead of chipmaker Advanced Micro Devices' earnings report after the bell.

The stock fell more than 6 percent on Wednesday, bringing its total October losses to 25 percent.

Despite the weakness, Matt Maley, equity strategist at Miller Tabak, pointed out AMD is still in the midst of an exceptional rally. After all, the stock is still up an eye-popping 130 percent this year.

"Here's a stock that's had this huge run, and it got so overbought; you rarely see a [relative strength index] chart get as overbought as that one was in September. So the fact that it's fallen so much recently actually isn't that big a deal because it hasn't broken any support levels. You want to look at the $22.15 level. That's where the trend line comes in from the summer lows, before it would really cause a major red flag," Maley said Wednesday on CNBC's "Trading Nation."

Broadly, however, Maley is cautious on the SMH, the popular semiconductor-tracking ETF. It was tracking for its worst month in nearly a decade, with a month-to-date loss of 14 percent.

Other components of the SMH, such as NVIDIA and Micron, are trading firmly in a bear market amid the U.S.-China trade war, and concerns swirl around China's economic growth.

Another chip name, Texas Instruments, fell on Wednesday after reporting quarterly earnings late Tuesday that disappointed investors. That stock was down more than 4 percent on Wednesday.

"This group needs to bounce back immediately and regain its 200-day moving average, or we're going to have big problems," Maley said, referring to the SMH.

Investors would be wise to stay on the sidelines instead of putting fresh money to work in semiconductors at this juncture, said Michael Bapis, managing director with Vios Advisors at Rockefeller Capital Management.

"You look at the overall market, and there's been nowhere to hide. So even if they were performing well, they wouldn't be doing well," Bapis said Wednesday on "Trading Nation."

"The other part of this is the semiconductor index has gone way up over the three and five years, so there is going to be profit-taking," he said. "What concerns us is most of the companies in the index are trading at super-high valuations, you may see demand slowing, and the perception is such that with these trade and tariff wars, with everything going on in China and across the U.S., that people are concerned with how this settles out."

AMD shares were trading 6 percent lower on Wednesday afternoon, slightly off session lows, at $23.53 per share. The SMH fell by 4 percent.

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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 CNBC and 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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