Something in the charts is making me bet against tech stocks: Trader

The big tech rally is starting to lose steam, according to trader Todd Gordon, who says that as a result, it's time to bet against the sector.

"We've been watching the tech sector underperform lately, and I think we're starting to carve out a top," the founder said Thursday on CNBC's "Trading Nation."

To make his case, Gordon takes a look at a daily chart of the QQQ, the Nasdaq-100 tracking ETF. According to Gordon, the QQQ has been making what he calls an "ending diagonal." In other words, the ETF is making lower highs, and forming a sort of "consolidation wedge" that doesn't show much room to the upside.

In addition, Gordon notes that the QQQ's relative strength index is making lower highs, which suggests that the ETF is losing momentum.

"Basically you're losing a lot of upside price dynamic, meaning there's not a lot of enthusiasm on the upside," the trader explained.

Beneath the surface of the fund, Gordon points out that big tech names like Alphabet, Amazon and Apple are also off their highs. Even Facebook, says Gordon, has "double topped," which he takes as a bearish indicator that the stock will fall.

In order to position for a reversal in the big tech rally, Gordon is buying the Oct. 6 weekly 145-strike puts and selling the Oct. 6 weekly 143-strike puts for a total of 55 cents, or $55 per options spread.

The QQQ opened Friday trading at $145.56. The trade breaks even at $144.45, and if QQQ closes at or below $143 on Oct. 6 expiration, Gordon enjoys his maximum profit of $145. If the ETF closes above $145 on Oct. 6, the entire premium paid will be lost.

In order to reduce the chance of this happening, Gordon plans to exit the trade if QQQ climbs to $146.50, a "double top" level he sees on a 60-minute chart of the ETF.

While QQQ has dropped slightly in the past week, the ETF is still up about 23 percent year to date.


Trades to Watch

Trader Bios


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

Read more