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Stock market faces a critical decision now, trader says

Stock markets face a critical decision because of Wall Street’s wildness, says Ascent Wealth Partners managing director Todd Gordon.”The big question on everyone’s mind here is this unbelievably historic rally that we’ve seen: Is it a bear market trap? Is it luring these poor unsuspecting lambs to the slaughter? Or is it simply, the market…

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Published on April 16, 2020

Stock markets face a critical decision because of Wall Street's wildness, says Ascent Wealth Partners managing director Todd Gordon.

“The big question on everyone's mind here is this unbelievably historic rally that we've seen: Is it a bear market trap? Is it luring these poor unsuspecting lambs to the slaughter? Or is it simply, the market is going to go to a new high with this unprecedented economic stimulus package from the government?” Gordon asked on Tuesday on CNBC's “Trading Nation.”

“The good news is I think the decision will be made very shortly.”

Gordon says the QQQ ETF, which tracks the Nasdaq 100, could give clues as to where the market heads next — the ETF has retraced two-thirds of the drop from February into March, a key technical pattern. Now, it needs to break through a zone of “potential resistance” forming at $220, an area the QQQ ETF butted up against in early March.

“If we are to fail, it should happen in this gray rectangle from $210 to $220 in the Nasdaq. If that were to happen then I think it would not be unreasonable to see a move back down into that zone,” said Gordon.

The QQQ ETF currently trades just above $209. It would need to rally 5% to reach $220.

Gordon has a way to take advantage of a possible retest of the lows using options.

“I'm looking at going out to the May 1 options — buying the $200 strike put, selling the $190 strike put. It's a $10 spread for which you'll pay about $1.70. … So, that's $170 of max risk that you'll take to potentially make $830,” said Gordon.

He notes that even if the chance of a retest is only as much as 30%, the attractive risk-reward ratio makes it a “good proposition.”