Trading Nation

The charts are signaling that a market rally could be ahead

Here's why a market rally could be in store

Stocks made a comeback Tuesday, and that has the founder of betting on an even bigger bounce for equities, saying the market looks to be "stabilizing."

On a daily chart of the S&P 500-tracking ETF (SPY), Todd Gordon points out that a few technical indicators have popped up that may signal the end of the recent correction.

"You can see that we have done a bit of a double bottom here in the SPY right around the $255 mark," he said Tuesday on CNBC's "Trading Nation." "That [and we also have] the 200-day moving average in the vicinity, so the market seems to be doing well."

Since options prices are elevated right now, Gordon wants to sell puts to make the bullish bet. Specifically he wants to sell the April 25 weekly 260-strike put and buy the April 25 weekly 255-strike put for a credit of $1.25, or $125 per options spread. This means that if SPY rallies and closes above $260 on April 25 expiration, then Gordon would make the $125 credit on the trade.

However, should SPY close below $255 on April 25, then Gordon could lose up to $380. To prevent such a loss, Gordon wants to establish a point at which to stop out of the trade.

"If the market begins to push back below the $255 mark, if we go for a third test of this support level, I think there's going to be sufficient momentum to push through," Gordon said.

All three major indexes had their best day of April on Tuesday and are now positive for the month, surging as words from Chinese President Xi Jinping momentarily assuaged fears of an impending trade war.