The is tracking for its worst week of the year.
After selling off for two days, the benchmark index now faces a key level which could mean the difference between an overdue pullback and a far worse bear market slump, says Todd Gordon, founder of TradingAnalysis.com.
"Simply look at the depth of each correction that we've seen since the late 2018 low in this historical run," Gordon said on CNBC's "Trading Nation" on Tuesday. "You'll start to collect a series of lows at the end of these lines that indicate where your support zone is."
Based on the five downturns this year, Gordon has identified a support zone on the SPY ETF, which tracks the S&P 500, from $285 to $289. The SPY ETF is less than a 1% decline from the bottom of that range.
If the SPY ETF fails to hold at the lower end of that zone, Gordon says it has a long way to drop before finding a cushion at its next level of support.
"We might have a test of the lower trendline if we are not just in a healthy uptrend pullback that we've seen since the lows back here in 2018," he said. "Basically if we overbalance and break through $285, the pattern says that we have implications to go down and test the lower support line."
Gordon has identified the lower support line at roughly $227, implying 21% downside from current levels. A drop of that size would push the SPY ETF deep into a bear market having fallen more than 20% from a 52-week high set last week.
"If we don't hold support I'm going to adjust my portfolio quite aggressively and start to protect on the downside," said Gordon.
Given increased volatility in the shorter term, Gordon says he prefers to be short puts rather than buy calls. He is selling the June 21 expiration 290 put and buying the 285 put to hedge against bigger swings. His call pays off if the SPY ETF expires in that range.
