As chipmakers try for a comeback the group faces key technical test, says chart watcher  

Semiconductor stocks are struggling to rebound.

The group has rallied more than 2 percent this week, attempting to turn around a 13 percent drop in the past three months. However, a major rally early on Tuesday failed to hold, raising concerns that chipmakers do not have the momentum to completely snap back.

Matt Maley, equity strategist at Miller Tabak, says they now face a make-or-break moment.

"Right now we're at a key juncture at least on a technical basis for this group," Maley said on CNBC's "Trading Nation" on Tuesday. "We've seen a little bit of a bounce here and it's made a couple of minor higher highs and higher lows. That's good."

Since its Oct. 29 low, the SMH semiconductor ETF has pinged from gains to losses, though each move has been made in an upward trend channel.

"The problem is it has to continue," said Maley. "If you look at a longer-term chart, it's made a classic rounding top. You can see that with the volume, which has what's called a saucer formation, but this rounding top, if it breaks below the November lows of just a few weeks ago, that's going to be very, very negative."

A rounding top has formed over the past year, a technical pattern that typically suggests the end of an upward move.

Semis' next move could also have an outsize impact on the broader tech sector and market, says Maley.

"If you go back in time, it's not just the past year, this group has been a leading indicator for the entire tech sector which of course has been a key leader for the entire market. So what happens not just over the last few weeks but really the next few weeks, it's going to be very important for the group," he said.

Stacey Gilbert, market strategist at Susquehanna, is cautious about the group given what she expects to be a rough first quarter. However, she does see one pocket of growth.

"One area where we see secular growth is in the AI space," Gilbert said on CNBC's "Trading Nation" on Tuesday. Susquehanna semi analyst "Chris Rolland recently upgraded Xilinx to a positive rating and a $95 price target because of its exposure AI and infrareds. … If we have to pick a name in the semi space you're going to want to go with individual names, Xilinx would be a place that we would look."

Analysts have an average overweight rating and $86.52 price target, according to FactSet. Susquehanna's $95 price target implies 8 percent upside from Tuesday's close.

Disclosure: Susquehanna is a market maker in Xilinx and SMH ETF.

Videos

Trades to Watch

Trader Bios

About

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

Read more

Connect