Trading Nation

Banks are at a critical level – here’s how one trader is cashing in

Key Points
  • Todd Gordon of sees downside brewing for financials.
  • Gordon said financials have been "retesting old lows."
  • Citigroup is expected to move 3 percent in either direction on Thursday's earnings report.

Trader bets against banks ahead of earnings

A big week is ahead for the financials sector as a handful of big banks get ready to report earnings, but Todd Gordon of sees downside brewing in the charts for the group.

Financials initially began the year as one of the best-performing sectors, but the sector has since slumped almost 7 percent. Citigroup, Wells Fargo and JPMorgan are all slated to report earnings on Thursday, and from a technical standpoint, Gordon believes investors should still bet against the banks.

"I think some technical damage is done to these financials and we might want to explore some additional downside," he said Monday on CNBC's "Trading Nation."

Looking at a chart of XLF, the ETF that tracks financials, Gordon not only sees a "good little downtrend" that has been in place since the year-to-date highs in March, but he also says that financials have been "retesting old lows." An example Gordon brings up is Wells Fargo, hovering near the $55 level that it last hit back in January.

With financials near their lows, Gordon is concerned that what's happening in the bond market could send the group even lower. A chart of the long-term bond-tracking ETF, TLT, shows that TLT has repeatedly hit the $122 level since December. Gordon sees this $122 as being especially important as it signals that TLT is "threatening to break." If a breakout above $122 in TLT were to occur, bond yields would fall, which could put even more pressure on bank stocks.

To profit from an XLF drop, Gordon wants to sell the April 13 weekly 23-strike calls and buy the April 13 weekly 24-strike calls. Gordon is selling the call spread for a 62 cents credit, or a credit of $62 per options spread. The $62 would be Gordon's maximum reward on the trade should XLF close below $23 when the trade expires on Thursday.

But should XLF close above $24 on Thursday's expiration date, a move up of about 2 percent, Gordon would lose $38. "I'm not going to put a stop on this; I'm fully comfortable taking the $38 of risk, so I'm going to carry this right through earnings," said Gordon.

Citigroup is expected to move 3 percent in either direction on Thursday's earnings report while JPMorgan and Wells Fargo have implied moves of over 2 percent on earnings.