Energy stocks are about to roll over: Trader

The recent rally in the energy space is not sustainable, according to technical analyst Todd Gordon.

On CNBC's "Trading Nation" Wednesday, the founder of said a divergence in the chart of crude versus energy stocks leads him to believe a breakdown may be in the works.

"At the lows [in January and February] you can see that the energy ETF, the XLE, made a higher low while crude oil made a lower low. This tells me that crude oil has made a new low and is likely to roll back over which, as history indicates, is likely to lead energy lower," said Gordon.

Oil has rallied more than 45 percent from its Feb. 11 low of $26, while energy stocks are up 17 percent in the same period.

Read MoreOil rally will end soon

Looking at a stand-alone chart of the energy ETF, Gordon noted that the XLE has rallied to a critical point of resistance. To find this resistance, Gordon measured the distance that the XLE traveled from its previous low to high and projected it to the current move, which resulted in near-perfect symmetry.

"All we need to do is wait for crude oil to begin to move to the downside. I think it's the time to move into a short position," said Gordon, who correctly called for a drop to $26 in oil earlier this year. "I'm just going to look to catch the initial push down here," he added.

To play for a move lower in the energy space, Gordon looked to the options market. Specifically, he purchased the April 60/55 put spread for $1.80. This is a bearish strategy where a trader will buy a put and then sell a lower strike put to offset the cost.

The goal is for the stock to move to the strike you are short, or in this case $55 in the next month. That's a nearly 10 percent move lower from where the ETF is currently trading at around $61.


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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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