Why oil stocks aren’t out of the woods

Why oil stocks aren't out of the woods
Why oil stocks aren't out of the woods   

Crude oil snapped its two-day losing streak Wednesday, making a run back toward the $60 level. But despite the bounce, one trader sees more downside for crude—and that could mean big trouble for energy stocks.

"Crude oil prices have really struggled to hold that $60 level and I think we will likely see downside to the mid-$50 range," technical analyst Todd Gordon said Wednesday on CNBC's "Trading Nation." And according to Gordon, lower crude oil combined with a strong dollar and a "top-heavy" market, could all drive energy stocks significantly lower.

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On a one-year chart of the SPDR Energy ETF, the XLE, Gordon noted that the XLE saw a gap down in late 2014 that has yet to be resolved. "The market has tried three times to close that gap and failed," said Gordon, founder of TradingAnalysis.com.

Technically, this signals further downside, he added. "I now expect the XLE to test its uptrend support which comes in around $77." That's roughly 3.5 percent lower than where the XLE ended Wednesday.

The ETF is up more than 11 percent from its lows and has been one of the most surprising trades of 2015.

If the XLE violates that support, said Gordon, there could be increased selling pressure. But if it were to hold, there's a buying opportunity.

So to make a short-term bearish bet on the XLE, Gordon purchased a put spread. In this strategy a trader will buy an in-the-money put option and sell a slightly out-of-the-money put to offset the cost. Specifically, Gordon purchased the June 80/78 put spread for 85 cents. Gordon's trade is profitable if the XLE falls below $79.15 by June expiration.

"Play for a near-term short in energy," said Gordon.

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