Why I’m worried about small caps: Trader

The Russell 2000's upward momentum is "waning," warns one trader who sees losses ahead for the small-cap index.

While the S&P 500 is up more than 2 percent over the past year, the Russell has dropped 3 percent.

"The divergence, or the momentum, has been lost," Todd Gordon, founder of TradingAnalysis.com, said Tuesday on "Trading Nation," pointing to a chart of the relative strength indicator, which is making "lower highs" relative to the Russell 2000.

One reason for the index's weakness is the financials, which have lagged recently, and comprise about a quarter of the Russell, as compared to about 15 percent of the S&P.

Gordon points out that the Russell has not yet eclipsed its 2015 peaks, as opposed to the S&P 500, which has made a series of all-time highs.

"They say don't sell a quiet market, but I'm very much on guard for a reversal out of this uptrend channel in the Russell," Gordon said.

"And we will be looking for short opportunities in the relative underperformer that is the Russell 2000."

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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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