Picking a good trade using technical analysis often involves more than looking at price alone, according to technical analyst Todd Gordon. And that's why he's looking at tech stocks now, specifically the ETF tracking the Nasdaq 100 (trading under the symbol QQQ).
When looking at an index, Gordon pays close attention to its advance-decline line. This indicator charts the number of stocks that are trading up minus the number that are trading down for a given period of time.
"That shows you breadth or if there's widespread participation on a bold move," he said. Gordon notes that the QQQ rallied in April and sold off. However, that selloff wasn't confirmed by the advance-decline line. In late May, the same thing happened again.
"Price made a new low but breadth did not confirm it," said Gordon, founder of TradingAnalysis.com. "There wasn't enough stock downticking to continue to confirm the selloff. So we're going to use that as a buying opportunity."
Specifically, Gordon is looking to sell a put on the QQQ with a strike price of 109 while simultaneously buying a put with a strike at 108. Both puts are very short-term, expiring by the end of the week. A put is a bearish bet giving purchasers the right to sell a stock at a given price within a set time frame.
"As the market moves higher or even go sideways and consolidate, the value of that put spread will decrease, creating a profit for us as volatility calms down," he said.
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