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This tech stock could break out: Trader

After sharp declines to start off the year, it seems like technology stocks are finally finding their footing.

The tech heavy Nasdaq 100 is breaking out, up 8 percent from its recent low. The move comes as all the major indexes posted their best three-day stretch since the market turmoil in August. According to one trader, the Nasdaq 100 move could reap big benefits for one of its biggest stocks: Microsoft.

"Microsoft has been outperforming the Nasdaq as a whole, and as the market is rebounding, I think there's more room to go on the upside," Todd Gordon told CNBC's "Trading Nation" on Wednesday. Microsoft shares are down 5 percent in 2016 while the Nasdaq 100, which tracks the Nasdaq composite's largest stocks, has fallen more than 8 percent in the same period. Microsoft is the second-largest holding in the Nasdaq 100, making up more than 8 percent of the index.

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Looking at a chart of Microsoft, Gordon noted that if the gains were to continue, the stock could soon test trend line resistance around $54 a share. "I don't know if we will be able to break through resistance to new highs, or if the market is going to fail," said the founder of TradingAnalysis.com and a CNBC contributor. Microsoft is 8 percent lower than its recent high of $56.85 hit in late December. "The idea is to put on a trade that targets that trend line."

The specific trade that Gordon recommended was the March 52/55 call spread. This is a bullish strategy where someone will buy a call and then sell a higher strike call of the same expiration to offset the cost. The goal is for the stock to rally to the strike you are short, or in this case to $55 (nearly 5 percent from current levels) by March expiration.

Given the recent volatility in stocks, Gordon warned to stop out of the trade if Microsoft shares were to fall below $50.


Gordon's thesis is in line with Wall Street's outlook for the stock. Of the 32 analysts who cover Microsoft, the average price target is $58.95 with an "overweight" rating.

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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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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