Chip Stocks on Verge of Big Breakout: Todd Gordon

As semiconductor stocks heat back up after a sell-off, one technical analyst thinks that investors should buy in now ahead of another rally. 

While there's controversy on the Street over the future of the chip industry, with bears saying that fundamentals are weak and the top is in, Todd Gordon, the founder of TradingAnalysis.com, remains bullish. "From a technical point of view, the chips are just in consolidation, waiting for the next leg up," said Gordon in an interview with CNBC's "Trading Nation" on Thursday. (See also: 2 Chip Makers to Buy on the Dip: Paul Meeks.)

Period of Consolidation Is Over, Says Technical Analyst

The analyst pointed to a chart of the VanEck Vectors Semiconductor ETF (SMH), an ETF that tracks chipmakers, noting the formation of an Elliot Wave triangle. Traditionally, a triangle in the Elliot Wave theory has five swings, reflecting periods of higher highers and lower lowers, noted Gordon. Eventually, "it gets to a point where there's so much built up energy that it has to make a decision," which is normally to move in the direction of trading prior to an Elliot Wave consolidation, said Gordon. For chips, which have experienced five recent swings, the natural way is back up, according to the analyst.  

"It looks like the period of consolidation is over," said Gordon, indicating that the test of the downtrend  resistance is around $107 or $108, and that "ultimately, it should move up above $115." SMH is up 0.7% on Monday morning at $107.71. 

Though the industry group has come under pressure, support has been found and major players are starting to make their way back up, which is another bullish indicator, noted Gordon. The technical analyst pointed to major holdings in SMH including Taiwan Semiconductor (TSM), Intel Corp. (INTC), NVIDIA Corp. (NVDA), Qualcomm Inc. (QCOM) and Texas Instruments Inc. (TXN).

He recommends playing the breakout with a butterfly spread, in which he will buy the October monthly 105-strike call, sell two of the October monthly 110-strike calls and then buy the October monthly 115-strike call. Gordon is targeted the middle strike of $110 for SMH. (See also: Intel’s Chip Lead Is ‘Disappearing’.)