This group of stocks has rallied too far, too fast: Technical analyst

Small-cap stocks fell about 1 percent on Tuesday, and Todd Gordon says it's just the first sign that the small-caps' recent run is done.

"It's been a little too far in a little too short period of time," the founder said Tuesday on CNBC's "Trading Nation." "We've moved up into technical resistance; I think it's time to look at the other side."

Gordon says the chart of the IWM, the ETF that tracks the Russell 2000 index for small-cap stocks, has fulfilled a typical pattern of "five waves" that feature "three trend waves and two corrective waves."

The recent runup that took IWM to near a 1-month high is a "straight directional rally" that is simply too sharp in relation to other recent moves. "That suggests bear market rally to me, so I think we're going to look to [a move down from here]," he said.

In order to play for an IWM stall-out, Gordon is selling the Oct. 6 weekly 141-strike calls and buying the Oct. 6 weekly 144-strike calls for a credit of about $1.28. Gordon will get to keep that entire credit if the IWM closes below $141 on Oct. 6; the trade breaks even at $142.28, and if the IWM closes above $144, he will suffer a maximum loss of $1.72 per share.

In order to avoid that scenario, Gordon has a plan to exit the trade if the ETF does, in fact, keep rising.

"If we were to break above this $142 mark here — cut the trade, contain the risk so we won't have to face a max loss situation," he instructed.

IWM is currently down more than 3 percent from its year-to-date high, which it hit on July 25.


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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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