The Pain For Chip Stocks Could Get Worse

Chip stocks, led by the sector exchange traded fund Market Vectors Semiconductor ETF SMH is experiencing its worst performance in three years.

Ari Wald, Oppenheimer's head of technical analysis and Bill Baruch, president of Blue Line Futures, discussed what's next for chip stocks in a recent CNBC "Trading Nation" segment.

Baruch: 'Clot The Bleeding'

The Market Vectors Semiconductor ETF includes 25 of the most notable and visible chip stocks and is days away from notching its first negative quarter since the third quarter of 2015.

There is some support in the ETF, which was trading at $103 Wednesday afternoon and hovering around the 200-day average just below the $102 handle. If the ETF has more downside ahead, then the "law of round numbers" may kick in at the $100 level and should "help clot the bleeding a little bit," Baruch said. 

Investors should also consider potential headline risk in the form of the White House imposing restrictions on Chinese investment in the U.S., Baruch said.

Wald: Stay Away From Chips

Technology stocks as a whole are unlikely to see sustained pressure, although investors should stay away from chip stocks, Wald said. While technical analysis suggests the ETF should bounce off its 200-day moving average, the concern is that the chip sector is "losing its leadership," she said. 

"Versus the tech sector, this industry has been making lower highs since March," Wald said. "It's really starting to break down more recently. This is a warning — it's falling lower in the momentum ranks and for that reason we see risk there. We would stay away from that group."

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