For those who might be tempted to buy recent market dips, one technically minded trader says there’s a chart that could be signaling bad news for the market, and investors may want to brace themselves.
“I hope you’re sitting down before I show you this next chart,” TradingAnalysis.com founder Todd Gordon said Wednesday on CNBC’s “Trading Nation.”
More specifically, Gordon believes that based on the performance of the S&P 500 sectors, it could be hard for the market to retake and break above the all-time highs it made Jan. 26. Of the 10 sectors that make up the S&P, Gordon points out that only the tech sector has broken above its Jan. 26 highs.
“Technology is doing the heavy lifting here. It’s doing a great job, but unfortunately I don’t think it’s enough,” he added.
In other words, it could be a while before the market returns to its highs.
As a result, Gordon wants to position for a move in the S&P 500 using options. Specifically, he is selling the S&P 500 ETF (SPY) April 16 weekly 275-strike call and buying the April 16 weekly 280-strike call for a $2.75 credit, or $275 per options spread.
If SPY closes below $275 on April 16 expiration, then Gordon would make the $275 on the trade. But if SPY were to rally and close above $280 on the expiration date, Gordon could lose $225.
“We are starting to hesitate at that last retracement level, which [tends to precede a lot of reversals],” he said. “So we’re starting to get a bit of a double top at around the $280 region here in the SPY, and it looks like we might be heading lower.”
The SPY was trading just above $275 on Wednesday as all three major market indexes gave up their gains from the morning open.