Don’t trust the bounce, the markets still look vulnerable, trader warns

TradingAnalysis.com's Todd Gordon isn't convinced the stock market bounce is strong enough to last.

Despite Tuesday's gains, Gordon says the market is set to resume its donward moves. He notes that the S&P 500-tracking ETF, the SPY, has broken below a key trendline. The uptrend Gordon points to extends from 2016 to the current day, with the SPY "really struggling to keep [its] head above this uptrend."

While he does expect another decline in stocks, he believes the market will bounce a bit higher before it happens. "I want to wait for a bit more of a rally in order to establish our short position, so you have to let the market come to us," he said Tuesday on CNBC's "Trading Nation."

Using a Fibonacci retracement tool, Gordon determines that a key level he is looking at is $270 on the SPY, about $4 above where the ETF was trading on Tuesday. If SPY got to that level, then Gordon would put on a trade to short the market.

The trade Gordon is looking at involves buying the March 14 weekly 270 strike put and selling the March 14 weekly 260 strike put for a total cost of $4.12 per options spread, or $412 per options contract. Gordon says that if the market were to bounce to around that $270 level, then the cost of the trade would be lower. This is a bearish trade that the SPY would fall as low as $260 by March expiration, or 2 percent lower than current levels.

However, based on the same Fibonacci retracement, Gordon also says that if the market bounces too high, then he would get out of the trade because he is essentially betting that SPY could fall below $260 on March 14 expiration.

"If we were to get above the last retracement of $279, then this trade is wrong, we need to get out," he said.

Despite Thursday's gains, the Dow and S&P 500 were still over 7 percent below their most recent record highs.

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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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