It's about to get worse for retail—here’s why: Trader

The retail space has been getting pummeled ahead of some notable earnings this week, with the S&P 500 industry group dropping more than 2 percent on Monday. But rather than use the selling as an opportunity to pick up some beaten stocks, one trader is betting that the pain for retail is just getting started.

According to Andrew Keene of AlphaShark, the retail sector ETF XRT has broken below several important technical levels at its moving average. Technicians often look to moving averages for clues on where a stock could go.

Keene believes that with XRT hitting resistance at its 200-day moving average and falling below its 50-day moving average, the August lows could be the next logical stop — roughly another 6 percent drop from where the ETF traded on Monday afternoon.

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"I'm playing with the pressure and the momentum to the downside," Keene said Monday on CNBC's "Trading Nation." "We did find a little bit of a base here. If we can puncture that 43.5 level, I think it's going to head back to the lows we got back in August."

Keene said retail stocks are overbought and the "huge pressure" from Monday will continue.

Among the worst performers on Monday were Macy's, Kohl's and Nordstrom, which are scheduled to report third-quarter earnings this week. Multi-line retail has had a rough year as brick-and-mortar stores struggle to compete with online retail giants such as Amazon.

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Also weighing heavily on the XRT is online travel giant Priceline, which reported third-quarter earnings on Monday and lower bookings growth expectations. The stock plunged 9 percent following its release.

In his bet against retail, Keene is buying the December XRT 43.50-strike put, and to offset costs and mitigate risk, selling the December XRT 42.50-strike put for 25 cents. This is a bearish bet that the retail ETF will fall below $42.50 by December expiration.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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