Chip stocks set for worst quarter in a decade. Here's why some say now is the time to buy the dip

Semiconductor stocks outperformed the broader market last week with the SMH, which tracks the sector's biggest names, posting a more than 4 percent gain.

But that only tells half the story. The ETF is currently down more than 18 percent since early October, and is on pace to post its worst quarter in a decade after getting hit hard by trade tension fears.

According to Piper Jaffray's chief market technician, Craig Johnson, now could be the time to "put some chips back on the table" since the market is "shifting more from defense into more of an offensive move."

Johnson believes $80 is a key level of support for the SMH. The ETF hit that level earlier last week and then bounced higher, so he believes the chart is indicating an uptrend.

"If you look at the SMH we've pulled right back to support around $80. We're starting to see on a ratio chart the SMH outperforming the S&P 500. I think now is the time to put some back on," he said on Friday's "Trading Nation."

While he thinks the ETF can move higher, he isn't expecting it to soar.

"We're probably going to be range-bound. Probably $80 on the lower end, $100 on the upper end. We're going to have to trade them in 2019, but I think this is a good way to trade it at this point," he added.

The SMH closed at around $86 on Friday, so hitting $100 would be a gain of more than 16 percent.

Applied Materials, Lam Research, Qorvo and AMD were among the SMH's top performers last week, with each name gaining more than 5 percent.

Boris Schlossberg, managing director of FX strategy at BK Asset Management, also believes the chip stocks are range-bound for the near future, which is why he's staying away.

"I think it's dead money for the time being. I would much rather short the rallies than try to buy the dips at this point," he said.

Schlossberg thinks there are a number of headwinds for the sector heading into 2019, including a peak in the capital expenditures cycle, trade tensions with China, as well as an overall slowdown in the cloud services space.

"Until we get 5G, until we get a new technology story that's kind of interesting and capex spend picks up, I really don't see a big upside to SMH," he contended.


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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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