As the emerging markets enjoy a great 2016, one trader believes that they can hit a level unseen since last year.
Todd Gordon of TradingAnalysis.com is keeping an eye on the ETF that tracks the emerging markets, EEM, because he sees EEM continuing its rise for a number of reasons.
"There have been some developments in the Chinese markets which allow basically outside, foreign investment into more private companies in China," Gordon said Tuesday on CNBC's "Trading Nation." "So the emerging markets are getting a boost."
"Plus, we have a falling U.S. dollar, plus we have commodities starting to find support, so this all points to higher prices in the emerging markets," he added.
But just how high can EEM go? According to Gordon, the emerging markets can rise another 8 percent in the next few months, which he shows on a daily chart of the EEM.
Gordon believes that "in a good advance, you'll look to the prior trend waves to figure out how far your current trend wave could go." As a result, Gordon looks at the EEM's first uptrend in the beginning few months of 2016, which saw the EEM go from $28 to $36, an increase of $8. Gordon takes that $8 increase and applies it to mid-May onward.
Since EEM sat at around $32 in May, if Gordon is correct, the EEM could hit $40 based on the previous $8 increase in the first quarter of the year. With EEM closing Friday trading at about $37, that would represent an 8 percent rally — on top of the ETF's 15 percent year-to-date gain.
Gordon's trade involves buying the October 37-strike calls and selling the October 40-strike calls for a debit of $1.16, or $116 per options contract.
The trade has Gordon risking $116 to make $183 if EEM closes at or above $40 on October expiration, with breakeven at the $38.16 mark.