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These charts show that it’s time to bet against bonds: Trader

The trader and founder of TradingAnalysis.com says the charts are pointing to a downturn in TLT, the ETF tracking long-term Treasury bonds.

While TLT is still up more than 6 percent year to date, Todd Gordon says that "bonds have been rejected from a key technical resistance level" and hence that TLT is about to tumble.

More specifically, Gordon is pointing to what he calls a "measured move," a term that defines a symmetrical trend from which technicians can predict the next move on a chart. In this case, TLT saw rallies from April through to May, and then throughout June that were exactly the same in length.

But after the first rally ended early May, TLT dropped for the rest of the month. Gordon predicts that Tuesday's decline in bonds could mean that the symmetry is still in play, and TLT could see a bigger move down as it did almost two months ago.

What's more, central bank-related events, like Federal Reserve Chair Janet Yellen's speech in London on Tuesday, could suggest that the bond market may be facing some uncertainty that could cause it to fall.

"We are heading into a period where we're getting a lot of information from central bankers, so I'm kind of interested to see how the fundamentals are colliding with the technical," Gordon said Tuesday on CNBC's "Trading Nation." "I'm interested in being short this market against that technical resistance."

Gordon wants to sell a call spread to take advantage of what he thinks is an upcoming bigger move down in bonds. He is selling the July 127-strike call and buying the July 130-strike call, giving him a credit of 88 cents. If TLT were to close below $127 on July 21 expiration, Gordon would get to keep the $88 he took in.

Above $127.88, Gordon would start to see losses. And if TLT closes at or above $130, Gordon would suffer the maximum loss of $212 on the trade.

"What you give up in that skewed reward-to-risk ratio with credit spreads like this, you pick up in probability of success, and that's one of the benefits of using options like that," said Gordon.

Bond prices fell sharply Tuesday, as the 10-year yield saw its biggest positive move since March.

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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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