Stocks are getting slammed. Here’s one way to trade it

Stocks got slammed again Tuesday as volatility returned to the market with a vengeance, and according to one trader there's more downside ahead.

On a day when all three major indexes fell thanks to a plunge in the tech sector, including the Dow which dropped back to correction levels, Todd Gordon of TradingAnalysis.com said the sharp decline in the S&P-tracking ETF (SPY) since mid-March is a bearish sign for the market.

"When you see that kind of panic buying, I usually suggest short covering rallies," Gordon said Tuesday on CNBC's "Trading Nation."

On a 60-minute chart of the SPY, he says the ETF has been "fairly well-contained in downtrend resistance." And according to Gordon, that resistance falls right at around the $268 region, and he sees the SPY heading lower should it hit that level.

Just how low? Gordon looks to the SPY's previous low back in mid-February at around $252.

"I'm looking at around the $252 region, that was the low from mid-February here," he said. "So we're looking for a rejection on down towards these old lows."

As a result, Gordon wants to buy the May monthly 262-strike puts and pair that with the sale of the 255-strike puts for a total cost of $1.74, or $174 per options spread. Should SPY close above $262 on May 18 expiration, Gordon would lose the $174 he paid to make the trade.

But if SPY closed below $255 on expiration, Gordon could make up to $525 on the trade.

In order to prevent losing that premium, however, Gordon also establishes a point at which to exit. He refers back to the old resistance levels he believes are in the charts for SPY.

"If the market were to move back above this resistance level just at around $269.40, let's go ahead and close the trade," he said.

SPY has fallen more than 3 percent in the last week.

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.

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

Connect