Top Nasdaq stocks in worst quarter in a decade, but one trader is betting on a short squeeze

The Nasdaq's largest stocks have had a horrible two months.

The Nasdaq 100, which contains heavyweights like Facebook, Tesla and Alphabet, is tracking for a 12 percent loss for the quarter, its worst quarterly performance in a decade.

Todd Gordon, founder of TradingAnalysis.com, says that steep decline could inspire a spring higher.

"The market is set for a bit of a relief rally and I want to be positioned for this possible coming short squeeze," Gordon said Tuesday on CNBC's "Trading Nation." The QQQ ETF, which tracks the Nasdaq 100, "has obviously gotten hammered here."

The good news is that each sell-off has become less extreme, says Gordon, suggesting pressure on the index is abating.

"Momentum as measured by RSI, which is the relative strength index, has actually been decreasing on each push to new lows," he said. "We saw a low RSI reading here on the initial push, we saw a second push but towards a higher low, and yet we saw a third push to an even higher low."

"At some point sellers' conviction will dry up. They will start to be afraid, shorts will start to cover, value shoppers come in and that's how you engage the short squeeze," said Gordon.

He anticipates a move higher to $168 to $171, implying 3 percent to 5 percent upside from current levels. To take advantage of that expected gain, he is buying the Dec. 21 $165 calls and selling the $168 calls, trading at $1.28 for a $3 spread. His maximum potential gain is $171.

"If the trade is going against you, cut it. So really we have about $60 of risk to potentially make $171, almost 3-to-1 reward-to-risk ratio, so certainly an attractive trade," he said.

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