×

This index is ‘ripe for a trade’

The small-cap rally is far from done, says Todd Gordon of TradingAnalysis.com, who argues that the charts point to even more gains for the group tracked by the Russell 2000.

"The Russell has been rallying sharply based on anticipated domestic policies that might be put through, namely tax reform, which would benefit small-caps the most," he said Tuesday on CNBC's "Trading Nation." "So we're seeing a little bit of resurgence here."

To determine how high the Russell 2000 could rally, Gordon looks at the Russell-tracking IWM ETF. He says that the current consolidation in IWM could actually see a repeat of the last time there was a pullback. Essentially, Gordon points to a slight pullback in IWM at the beginning of September and says the slight drop in IWM at the beginning of this month mirrors the distance of the first.

This "symmetry" leads Gordon to believe that IWM is "ripe for a trade." In fact, Gordon sees the IWM heading up to $152 if it were to repeat its moves in September.

As a result, Gordon is buying the Nov. 3 weekly 150-strike calls and selling the Nov. 3 weekly 152-strike calls for a total cost of about 78 cents, or $78 per options spread. The $78 paid for the trade is Gordon's maximum risk, which he could lose if IWM closes below $150 on Nov. 3 expiration. But if IWM were to close above $152 on Nov. 3, then Gordon would see a maximum reward of $122.

However, to prevent the possible $78 loss, Gordon picks a certain level at which to stop out of the trade. He sees "support" at the IWM's recent breakout point at $148, and says he will absolutely exit the trade if IWM drops below that point.

"If we were to break back below that level, I want to get out of this trade, contain my risk," he explained. "Otherwise if that support holds, we should be able to reach up to around $152 in IWM."

IWM is currently up 10 percent year to date, seeing a big rally back in August amid whispers of tax reform.

Videos

Trades to Watch

Trader Bios

About

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.

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.

Read more

Connect