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Semiconductor Stocks Surge Even During Chipmaker Shortage, But the Charts Hold a Warning

Aly Song | Reuters

A global chip shortage is roiling the auto industry.

Ford announced plans last week to temporarily idle production of its F-150 at a Michigan plant, and Chinese EV start-up Nio announced a five-day shutdown of a factory. These automakers joined a growing list of companies halting production, including GM and Jeep automaker Stellantis.

The semiconductor stocks are rallying undeterred, though. The SMH semiconductor ETF has gained nearly 11% this year, almost double the gains on the broader S&P 500.

Craig Johnson, chief market technician at Piper Sandler, says the coast is not clear for semiconductors.

"We've violated the uptrend support line coming off of those March lows, and now you're starting to see some sort of sideways price action, possibly a little head-and-shoulders top in the making here in the charts," Johnson told CNBC's "Trading Nation" on Friday.

A head-and-shoulders pattern – formed by a high, a higher high and a lower high – suggests a failed attempt to break out and indicates possible downside ahead.  

Johnson recommends caution when it came to buying the group.

"Semiconductors have done very well, but I'm in this cautionary phase with these names given some of these things that I'm starting to see play out in the charts," said Johnson.  

Danielle Shay, director of operation of Simpler Trading, is more bullish on the semis space and says pullbacks could be a buying opportunity.

"We've seen so much volatility when it comes to the semiconductors. Think back to the trade war. Every time that ramped up, we had huge volatility in the semiconductors, but we're significantly higher than we were at that point. I think that this chip shortage is just going to be a little blip, and I think it's a great buying opportunity particularly for Taiwan Semiconductor," Shay said during the same interview.

Taiwan Semiconductor has pulled back sharply recently, down 18% from a February peak. The SMH ETF, by comparison, is down 6% from its own February peak.

Disclosure: Simpler Trading holds TSM.

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