Classic indicator signals trouble for stocks

Classic indicator signals trouble for stocks
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Stocks were rallying Friday after two straight days of losses, but despite the gains, one trader who relies heavily on the charts says now is the time to sell stocks, and he's basing his thesis on a time-tested theory.

On CNBC's "Trading Nation," technical analyst Todd Gordon said weakness in the transports could mean a rollover in the broader market.

"If you look at a chart of the Dow Jones industrial average and compare it to the , the IYT, you'll see that as the Dow has made new highs, the IYT has diverged lower," Gordon said. This divergence, he said, is a "classic" sell signal for the broader market. The Dow is up around 1 percent year to date, while the IYT is down more than 5 percent.

Technicians often look to the transports for confirmation on the direction of the market, as many of the stocks that comprise the index are closely tied to the economy. This relationship is known as the Dow Theory. And although the index rallied on Friday with the intraday decline in crude, Gordon is using any move higher as an opportunity to sell.

"We see crude pushing transports lower along with the broader market," said Gordon. "I see the IYT falling to a minimum of $147.37."

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So to make a bearish bet on the ETF, Gordon turned to the options market. Specifically, he purchased the June 154/147 put spread for $2.33. In this structure, Gordon is targeting a move lower to $147, but in order for it to be profitable, he needs the IYT to fall below $151.67 by June expiration.

"This is a good trade to minimize your losses by just being short the ETF outright."

The IYT was up nearly 1.5 percent midday Friday.

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