Global stock markets steadied Wednesday despite disappointing factory data out of China. Recent turmoil in equities across the globe has been at the center of attention for many investors, and according to one trader, bouts of volatility will continue to plague the markets, at least for the next couple of months.
"The major reason the Fed didn't see it as time to raise rates is this [global uncertainty]," Todd Gordon said Tuesday on CNBC's "Trading Nation." "I think you have to be short here." And Gordon is setting his sights on one beaten group of stocks.
Looking at a chart of the , the ETF that tracks emerging markets, Todd Gordon noted the tight correlation to a commodity that is often viewed as a leading indicator for the global economy: . "You can see these two are very well interconnected over the past year," said the CNBC contributor and founder of TradingAnalysis.com. When copper prices fall, traders see it as a warning. "I think that's indicative of underlying weakness … specifically in the emerging markets."
For Gordon, the recent selloff in the EEM is particularly alarming. "We've broken uptrend support, which will now serve as resistance, and should serve as a launching pad on the way down." The EEM, which is highly exposed to the Chinese stock market, has fallen more than 18 percent in the past three months.
So to protect himself from an even steeper selloff, Gordon purchased a put spread. This is a bearish strategy by which a trader will buy one put and then sell a lower strike put of the same expiration to offset the cost. The goal is to have the stock, or in this case ETF, fall to the lower strike.
Specifically, Gordon purchased the EEM November 32/30 put spread for 53 cents. That $0.53 cents is the most Gordon can lose, but in order for the trade to be profitable, Gordon needs the EEM to fall between $31.47 and $30, or as much as 9 percent, by November expiration.
"I think we could move lower and retest those $30 lows," added Gordon.
The EEM was trading around $32.90 early Wednesday.
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