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I'm selling the rally—here's why: Trader

Sell the stock rally: Trader

Since hitting a low on Aug. 24, the S&P 500, and have rallied a respective 6, 7 and 11 percent. But rather than take the positive price action as a sign to jump in, one trader who looks closely at the options market insists stocks will soon retest its August low.

"We've seen some nice moves in the last few days but I think these rallies should be sold," Andrew Keene said Monday on CNBC's "Trading Nation." The S&P 500 is up nearly 3 percent in the past week and is on track for its fifth consecutive day of gains, which would mark its longest winning streak since December 2014.

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Looking at a chart of the SPY, the ETF that tracks the S&P 500, Keene noted that it has rallied to its 50-day moving average, which has proved to be a bearish indicator in the past few months. "Every time we have rallied to this moving average we have found sellers," said the founder of AlphaShark Trading. Additionally, Keene noted that with the 50-day moving average continuing to trade below the longer-term 200-day, the chart remains bearish, at least in the short term.

"I think the SPY needs to go back down to that $182 level in order to see if we can find buyers," he added. The SPY was trading around $198 Monday afternoon.

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So to make a bearish bet, Keene bought a put spread. Specifically, Keene purchased the SPY January 187/182 put spread for $1. This is a bearish strategy where a trader will purchase one put and then sell a lower strike put of the same expiration to offset the cost. The goal of this trade is to target the lower strike put, or in Keene's case $182 by January expiration. That's an 8 percent decline in less than three months.

"The options market is implying a move as low as $182 or as high as $212 by January," Keene said. "I think we are going to retest the lows and this is a great reward to risk setup playing the SPY to the short side."

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