Trading Nation

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

Here are the key market levels one trader is watching'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.