Chip stocks have been hammered, and a rare divergence could point to even more ‘coming trouble’

Chip stocks have been hammered, and a rare divergence could point to even more ‘coming trouble’ 

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Chip stocks have plunged almost 6 percent in the last month, and Todd Gordon of TradingAnalysis.com says there’s even more trouble ahead for the group.

“The volatility is up here in the market, and what we’re seeing now is semis, which had been really strong and leading technology up, [are] starting to lag,” he said Thursday on CNBC’s “Trading Nation.”

What troubles Gordon most is he divergence between the SMH ETF, which tracks the semis, and EWY, which tracks the South Korean stock market. According to Gordon, those two ETFS track each other closely. But recently, they’ve started to diverge, and Gordon says that could indicate slowing demand from a key Asian market. In short, Gordon said it's a “sign of coming trouble” because the two had been correlated for years.

Furthermore, Gordon also observes a head and shoulders pattern in SMH, followed by a neckline that had been forming in the last few months.Gordon believes that the SMH is targeting a return to that neckline, which means he sees SMH falling to around $96.To play for the move, Gordon bought the August monthly 100-strike put and paired that with the sale of the August monthly 94-strike put for about $1.74, or $174 per options spread.If SMH closes below $94 on the Aug. 17 expiration, then Gordon could make up to $426 on the trade. If it closes above $100, however, he would lose the $174 he paid to make the trade.

The trade: Gordon is suggesting buying the SMH August monthly 100/94 put spread for about $1.74, or $174 per options spread.

Bottom line: Gordon sees SMH falling below $94 on Aug. 17 expiration.

Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Stacey Gilbert is the head of derivative strategy at Susquehanna.

Managing Director, ACG Analytics

Managing Director, Head of Technical Analysis, Evercore ISI

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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.

Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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