Trading Nation

These ‘red flags’ are pointing to a market drop, trader warns


Trader sees the market rally losing steam
Volatility hits 55-year low
Is the dollar’s bull run over?

The rally in gold and bonds may signal a drop ahead for stocks, leading Todd Gordon of to bet against the market.

Looking at a chart of the S&P 500 versus gold and Treasurys, Gordon points out that the latter two have been rallying since the start of the year. This, in turn, is not a good signal for the market rally given that gold and bonds have an inverse relationship with the S&P.

"As you expected, gold and bonds were sold off because those are generally safe-haven markets," Gordon said on Thursday on CNBC's "Trading Nation." "Gold and bonds are kind of waving a red flag here saying heads up."

Not only that, but the trader also believes that "the stock market has moved into serious technical resistance." More specifically, a chart of the S&P 500-tracking ETF (SPY) shows a "parallel channel" whose upper ceiling SPY can't seem to break above, leading Gordon to say that there is "a lot of resistance in the SPY between $235 and $240."

Gordon believes that if SPY were to drop, the ETF could fall to the lower line of the channel sitting around $220. In other words, the S&P 500 could be headed for a drop of about 6 percent in the next two months.

To hedge his portfolio, then, Gordon buys the April 230-strike puts on the SPY and sells the April 225-strike puts, for a total of about $1 per share. Gordon would earn a maximum reward of $4 per share if SPY closes below $225, about 4 percent below Friday's levels.

The SPY dropped slightly in Friday trading.