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 TradingAnalysis.com 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.
