U.S. markets are likely to rally if Washington is able to avoid a year-end budget crisis, but traders should use any pop to sell crude oil, a veteran trader told CNBC's "Futures Now" on Tuesday.
"I think you have to be very cautious here," said Rich Ilczyszyn, founder and chief market strategist of iiTrader, noting many economic outlooks for 2013 are weak, which probably won't bode well for oil.
Markets have been on edge for months about whether lawmakers can make a budget deal to avert the "fiscal cliff'' — automatic spending cuts and tax hikes that analysts say could stoke a recession.
Professional trader Anthony Grisanti agreed that a "fiscal cliff" deal will likely provide an initial pop for equity markets, but he doesn't think oil prices will experience a sustained rally. He, too, recommends selling oil on any "fiscal cliff"-related rally.
In addition to concerns about the U.S. budget crisis, oil prices fell Tuesday as global fuel demand outweighed ongoing worries about instability in the Middle East.
"The oil market here is probably overpriced. If you took all geopolitical risk off the table, I think we'd basically be lower … oil should be much lower than it is," Ilczyszyn said, adding that within the past few months, oil has traded within a range of $84 to $90 a barrel. "We have plenty of supply here, so really you have to look at the chart. We're in this band and we need some kind of catalyst to break us out either side."
Between the "fiscal cliff" and sluggish economy, Ilczyszyn said he's bearish on equities.
"The lower equities go, the lower gold will go and in my opinion, the lower crude oil will go," he said, adding he's selling E-mini Crude Oil into the January contract at $88.40 with a stop at $90.40 and a price target of $85.40.
Should crude drop to the $85.40 level, though, Ilczyszyn said he would exit the trade and possibly flip his position. If oil hits the $90 level, he'd sell oil.