The Nasdaq’s largest stocks have had a horrible two months.
Todd Gordon, founder of TradingAnalysis.com, says that steep decline could inspire a spring higher.
“The market is set for a bit of a relief rally and I want to be positioned for this possible coming short squeeze,” Gordon said Tuesday on CNBC’s “Trading Nation.” The QQQ ETF, which tracks the Nasdaq 100, “has obviously gotten hammered here.”
The good news is that each sell-off has become less extreme, says Gordon, suggesting pressure on the index is abating.
“Momentum as measured by RSI, which is the relative strength index, has actually been decreasing on each push to new lows,” he said. “We saw a low RSI reading here on the initial push, we saw a second push but towards a higher low, and yet we saw a third push to an even higher low.”
“At some point sellers’ conviction will dry up. They will start to be afraid, shorts will start to cover, value shoppers come in and that’s how you engage the short squeeze,” said Gordon.
He anticipates a move higher to $168 to $171, implying 3 percent to 5 percent upside from current levels. To take advantage of that expected gain, he is buying the Dec. 21 $165 calls and selling the $168 calls, trading at $1.28 for a $3 spread. His maximum potential gain is $171.
“If the trade is going against you, cut it. So really we have about $60 of risk to potentially make $171, almost 3-to-1 reward-to-risk ratio, so certainly an attractive trade,” he said.