Weakness in this sector could spell trouble for the FANG trade

The S&P 500 has rallied this month, but one sector has failed to keep up.

The XLC communications services ETF is flat for February, underperforming the broader market's 3 percent rally. The newest S&P 500 sector holds three-quarters of the FANG trade — Facebook, which is lower for the month, Alphabet, which is flat, and Netflix, which is higher.

Todd Gordon, founder of TradingAnalysis.com, says resistance in the broader market could exacerbate weakness in the sector.

"We have a series of three tops right around $280 in the SPY, 2,800 in the S&P 500. I think that is going to be a source of resistance so we have resistance in the broader market," Gordon told CNBC's "Trading Nation" on Tuesday. "Back to XLC, this product I think has been underperforming on the bounce back. So, with the idea that we are facing resistance in the broader market, I think it's going to make sense to hedge."

Using Fibonacci retracement technical analysis to identify support and resistance, Gordon says the $47 level should provide a ceiling for the ETF, and the $43.50 to $44 level is an area of support.

"Provided we stay under $47, we should be able to move down to the $43.75 area right there. So this is the whole move that I'm really looking for, just a little bit of a pushdown," said Gordon.

A move to $43.75 implies 5 percent downside from Tuesday's close. It broke above that range in late January.

To take advantage of the expected downside, Gordon is buying the $46 put and selling the $44 put with March expiration. That's a bet that the XLC ETF will remain below the higher end but hold above the lower end. The ETF currently trades above the high end of that range at $46.23.

"Altogether that $2 put is 50 cents, so we have 50 cents of total risk against a potential reward of $1.50," added Gordon. "I generally like to risk about half of the premium paid, … so I'm going to go ahead and pay the 50 cents for this — 50 to make 150 — [but] really only 25 cents of risk because at that point we would cut the trade."

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 CNBC and 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