Stocks got slammed again Tuesday as volatility returned to the market with a vengeance, and according to one trader there’s more downside ahead.
On a day when all three major indexes fell thanks to a plunge in the tech sector, including the Dow which dropped back to correction levels, Todd Gordon of TradingAnalysis.com said the sharp decline in the S&P-tracking ETF (SPY) since mid-March is a bearish sign for the market.
“When you see that kind of panic buying, I usually suggest short covering rallies,” Gordon said Tuesday on CNBC’s “Trading Nation.”
On a 60-minute chart of the SPY, he says the ETF has been “fairly well-contained in downtrend resistance.” And according to Gordon, that resistance falls right at around the $268 region, and he sees the SPY heading lower should it hit that level.
Just how low? Gordon looks to the SPY’s previous low back in mid-February at around $252.
“I’m looking at around the $252 region, that was the low from mid-February here,” he said. “So we’re looking for a rejection on down towards these old lows.”
As a result, Gordon wants to buy the May monthly 262-strike puts and pair that with the sale of the 255-strike puts for a total cost of $1.74, or $174 per options spread. Should SPY close above $262 on May 18expiration, Gordon would lose the $174 he paid to make the trade.
But if SPY closed below $255 on expiration, Gordon could make up to $525 on the trade.
In order to prevent losing that premium, however, Gordon also establishes a point at which to exit. He refers back to the old resistance levels he believes are in the charts for SPY.
“If the market were to move back above this resistance level just at around $269.40, let’s go ahead and close the trade,” he said.
SPY has fallen more than 3 percent in the last week.
