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

The rally in gold and bonds may signal a drop ahead for stocks, leading Todd Gordon of TradingAnalysis.com 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.

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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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