This S&P 500 tracker could drop 20% if this happens

At the moment, the S&P 500 is tracking its worst run in a week for the year as a two-day sell-off has left the benchmark index facing a break or make for one of its key indicators.

According to Todd Gordon, that key indicator could decide whether an overdue pullback materializes or the S&P 500 embarks on its worst bear market fall.

Speaking on CNBC’s “Trading Nation,” Gordon noted that analyzing every correction witnessed since the low of late 2018 presents a historical run with a series of lows indicating where the support zone lies.

Basing his estimates on five downturns witnessed in 2019 so far, the founder has pointed to the SPY ETF for the support zone. The fund tracks the S&P 500, and Gordon puts it in a range of between $285 and $289.

Currently, the SPY ETF teeters at just above 1% from hitting the bottom of the stated support zone.

According to Gordon, breaking below that range will see the SPY ETF continue to tumble for a long while before it finds a cushion at the next support level. The gauge will have to test the bottom of the trendline if an uptrend doesn’t materialize and a break below $285 could see it tumble to the lower support line.

$227 is the likely lower support line and that could mean a downside of about 21% from the levels we are at presently. Should such a drop happen, the SPY ETF would become bearish, dropping deeper into bear territory, and 20% lower from its 52-week high reached a week ago.

Gordon suggests that if support does not hold, it would be advisable to adjust portfolios “quite aggressively” to protect against the inevitable downturn.

He also cites the potential for high volatility in the near term, and thus notes a preference for short puts as opposed to buying calls.

Uncertainty following a decision by the U.S. to increase tariffs on goods from China and a potential escalation of talks means traders are a bit more cautious.