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Chips are stuck in a correction, but one chart points to a breakout

VIDEO4:1804:18
Chips still in correction, but charts point to breakout

This month's chipmaker stock surge hasn't been enough to escape correction territory.

Since hitting a record high in April, the SMH semiconductor ETF has fallen nearly 12% as the U.S.-China tariff tit-for-tat tariff war roiled the trade-sensitive group. The ETF is linked to the Philadelphia semiconductor index, the SOX.

Mark Newton, technical analyst at Newton Advisors, says relief could be ahead for the slammed semis.

There have been "signs that this group is starting to stabilize and turn back higher even though a deal has not been done yet," Newton said on CNBC's "Trading Nation " on Wednesday. "In the last few weeks, we've seen evidence that it was going to break out, pull back, and then [Monday] moved to the highest level we've seen in the last four or five days."

"This is a very bullish move on a short-term basis that leads me to think that this sector is starting to outperform, not only within the broader group but also within the broader index. So you can see a further bounce in this group right up to levels right near 1,500 or so on the SOX," said Newton.

He measures this move higher based on the previous failed breakout from late May to the peak last week. He says the SOX index could a similar upward move that brings the index right to that 1,500 level. That represents 7% upside from current levels.

The broader comeback in the tech sector should also support a recovery in the semis stocks, says Newton.

"You've seen a pullback in tech since April. It has lagged. However, you haven't really broken all these longer-term up trendlines, so tech in general is still attractive on an intermediate-term basis," said Newton. "This minor pullback is likely going to turn out to be a buying opportunity into the summer and fall before you see any broader peak."

Quint Tatro, founder of Joule Financial, says a comeback in the chips is contingent on progress in the U.S.-China trade talks.

"If you can tell me what happens with China, then I'll tell you what happens with the semiconductors. There's names that we like that we own from a valuation standpoint that are becoming very attractive. Analog Devices, for instance, trading 20x forward earnings, earnings that are set to rebound but again it's got 25% of revenue in China, so if all of a sudden we backpedal or we continue to stagnate here with any deal, these are stocks that are going to get hit, " said Tatro.

If a deal was to be made, though, Tatro likes Analog Devices and Texas Instruments in the semis space. While the SMH ETF has fallen nearly 1% over the past three months, Analog Devices and Texas Instruments have both added 1%.

Disclosure: Joule Financial owns stock in Analog Devices and Texas Instruments; Tatro personally holds shares of Analog Devices.

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