Chip stocks are poised to fall further, according to the charts

Chip Stocks Are Poised to Fall Further, According to the Charts

After a strong rally in semiconductor stocks over the past year, technical indicators suggest that the sector may be on the verge of a significant pullback. While chipmakers have enjoyed strong tailwinds from AI adoption, data center expansion, and increased consumer electronics demand, a closer look at the charts reveals troubling signs that investors should not ignore.

Overbought Conditions and Weakening Momentum

One of the first warning signals comes from the Relative Strength Index (RSI), a key momentum indicator. Many leading semiconductor stocks, including Nvidia (NVDA), Advanced Micro Devices (AMD), and Taiwan Semiconductor Manufacturing Company (TSM), have RSI levels hovering around or above 70—an indication that these stocks are in overbought territory. Historically, such conditions have preceded periods of consolidation or sharp declines.

Furthermore, Moving Average Convergence Divergence (MACD) indicators show bearish crossovers in several semiconductor names, suggesting that upward momentum is fading. This weakness indicates that traders who drove these stocks higher may now be taking profits, leading to increased volatility and potential downside risk.

Breaking Key Support Levels

Another troubling sign for chip stocks is their failure to maintain key support levels. Many semiconductor ETFs and individual names have recently breached their 50-day moving averages, a technical level that often serves as a short-term support zone. If stocks continue to break below their 200-day moving averages, it could signal a deeper correction ahead.

For example, Nvidia, one of the biggest drivers of the semiconductor rally, has struggled to maintain its upward trendline. A confirmed breakdown below key support levels could trigger further selling pressure, particularly from algorithmic traders and institutional investors.

Sector Rotation and Macroeconomic Headwinds

In addition to technical indicators, broader market dynamics are shifting. Investors appear to be rotating out of high-growth technology stocks and into more defensive sectors such as healthcare and utilities, which tend to perform better in uncertain economic conditions.

Macroeconomic factors also present challenges. Rising bond yields, persistent inflation concerns, and the Federal Reserve’s stance on interest rates could further pressure semiconductor stocks, which are particularly sensitive to changes in monetary policy. If credit conditions tighten, companies in the sector may face higher borrowing costs, impacting their ability to invest in research, development, and manufacturing expansion.

What Investors Should Watch Next

While short-term downside risks appear elevated, investors should monitor a few critical levels to gauge where chip stocks may find support. The semiconductor-heavy VanEck Vectors Semiconductor ETF (SMH) and Philadelphia Semiconductor Index (SOX) are key indicators of overall sector strength. If these benchmarks continue to weaken, it could confirm the broader downtrend.

Additionally, upcoming earnings reports will play a crucial role. Any signs of slowing revenue growth or weaker-than-expected forward guidance could accelerate the decline in chip stocks. Supply chain disruptions, geopolitical tensions, and declining consumer demand for electronics could further weigh on sentiment.

Final Thoughts

While the long-term outlook for semiconductors remains strong due to AI, 5G, and increased automation, the charts suggest that the sector may be due for a correction in the near term. Investors should exercise caution, consider taking profits, and watch key technical levels closely. If support levels continue to break, chip stocks may have further room to fall before finding a solid base for their next move higher.