A brave trade: Why one technical analyst is betting on retail stocks

Retail stocks have been badly punished this year, but Todd Gordon of TradingAnalysis.com sees opportunity in the hammered group.

Examining a chart of the SPDR S&P Retail ETF (XRT), Gordon spots "support" at around the $38.50 level, which is roughly where it closed on Thursday.

So long as the ETF manages to hold that level, "the XRT could actually bounce back and retest the $40 or $41 level that it last hit in early August," Gordon said Thursday on CNBC's "Trading Nation."

To make his bullish play, the trader is turning to the options market. Specifically, Gordon is selling the September monthly 39-strike put and buying the September monthly 35-strike put for a net credit of 84 cents, or $84 per options spread.

If XRT closes above $39 on Sept. 15 expiration, then Gordon would make the $84 credit on the trade. But if XRT were to close below $35, 9 percent below Thursday's levels, then Gordon would lose $316.

Yet he plans to exit the trade early, instead of potentially taking such a large loss.

"This is a countertrend trade, so when you're going in so much against the trend, because retail has obviously been under a lot of pressure, you need to have a very contained stop loss," said the trader.

Specifically, Gordon plans to exit the trade if XRT falls below $38, just around the "support" line he established.

The XRT fell 1.6 percent on Thursday, and is now down 13 percent for the year.

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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.

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