This rally is 'false' and here's the tell: Trader

Stocks continued to grind higher Wednesday with the S&P 500, Dow and Nasdaq tracking for their largest two-day gains since early March — but the lack of participation in a crucial area of the market has one trader calling foul on the rally.

"I'm taking a look at a very interesting divergence in two key markets that I think could lead to a potential false breakout in the unbelievable rally that we've seen in the S&P 500," Todd Gordon told CNBC's "Trading Nation" early Wednesday. The S&P has surged 2 percent since Tuesday's opening bell, pushing the large-cap index near a one-month high.

However, it's the absence of selling pressure in the bond market, which typically moves inversely with equities, that has Gordon erring on the side of caution. "The bonds are not confirming where the S&P is going," he said.

Looking at a chart of the TLT long-term bond ETF versus the S&P 500, Gordon noted that as stocks move higher the ETF has not broken its respective support level. "We'd like to see the TLT pushing lower indicating that the market is driving out of the safety of bonds and into stocks," said the founder of TradingAnalysis.com. "[Investors] are holding their bond positions and I think that indicates a false breakout in the S&P," he said.

The S&P 500 was up more than half a percent midday Wednesday.


Trades to Watch

Trader Bios


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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

Read more