Trading Nation

Banks are on the brink of cracking a critical level

Trader sees trouble brewing for the financials

The chart of the financials has reached a very precarious level, according to founder Todd Gordon.

Not only is the financials-tracking ETF (XLF) down about 1.5 percent year to date, but Gordon says its underperformance relative to tech stocks makes it among the most vulnerable in the event of a market pullback. Here's why:

• The XLF has fallen back down to the $26.50 level about four times this year. Gordon believes any weakness in the XLK could trickle down to financials, and push the XLF tumbling below that level.

• Furthermore, big bank names like J.P. Morgan, Wells Fargo and Bank of America have also fallen and are struggling to make a comeback.

• As a result, Gordon wants to buy the July 6 weekly 27.5-strike put and sell the July 6 weekly 26.5-strike put for a total of 34 cents, or $34 per options spread.

The trade: Gordon is suggesting buying the July 6 weekly 27.5/26.5 put spread for about 34 cents, or $34 per options spread.

Bottom line: Gordon sees XLF falling as low as $26.50 by July 6 expiration.