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.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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