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Something I just saw in the charts made me bet against stocks: Trader

An unsettling trend has appeared in the charts, and that has one trader betting against the S&P 500.

According to Todd Gordon of TradingAnalysis.com, the divergence among major indexes is a warning sign that a pullback could be on the way.

Gordon starts with a chart of the Dow Jones transportation index to make his point, noting that the index is "not looking very healthy" as it has been "putting in a lower high" in the past few weeks. The chart has been making a "traditional head-and-shoulders pattern," and with the lower highs Gordon believes the index could fall below the neckline in that pattern.

"If you start getting a push through 13,700, that's not good," he said Thursday on CNBC's "Trading Nation." "That's not going to be a bullish sign at all."

And while the transports have been putting in lower highs, the S&P 500-tracking ETF (SPY) has put in what Gordon calls a "double top." Technicians believe that a double top usually precedes another drop in a stock price, meaning that Gordon believes the SPY is set to drop as well.

Adding to what could be bad news for stocks, Gordon points out how the ETF that tracks the Nasdaq 100, QQQ, is outperforming — a sign that tech stocks bear a great deal of responsibility for the S&P's rise to record highs.

"We're seeing pretty good underperformance in sectors such as energy and the financials, and a lot of this is the move up in Apple, Google, Amazon and Facebook," he explained. "So we need tech to continue, or we might see some continued downside."

As a result, Gordon is betting against stocks. He explained that he bought some June monthly SPY puts to hedge his equity portfolio in case of a drop in the market. These are options that will profit if the SPY slides.

"This is a short-term hedge just to look at about a 3 to 5 percent downside in the S&P," said Gordon. "If the market regains footing and goes higher, I'm happy to cut that hedge."

All three major indexes were down on Thursday, retreating after the S&P and the Nasdaq hit new all-time highs earlier in the week.

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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.

Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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