Oil has made a big comeback in recent months, but one trader argues that the rebound will soon stall.
Andrew Keene of AlphaShark made his call on the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) with help from the Relative Strength Index, a benchmark used by technical analysts to determine when an asset is oversold or overbought.
"When the RSI hits 30, as a generalization it's oversold. When it hits 70, it is overbought," Keene said Tuesday on CNBC's "Trading Nation." "We see the RSI here hitting that 70 point level. Last time it hit 70, it was back in October. What happened? XOP started to head downward, so I think the XOP can head lower."
This is confirmed by what Keene sees on the weekly chart of crude oil, which shows that long-term trends continue to point lower.
To profit from oil's potential drop, Keene recommended buying the September 30/28 bear put spread on the XOP for 50 cents. This is a trade that will show a profit if XOP is below $29.50 at September expiration. On Wednesday, XOP was trading at $36.39.
"Because the short-term momentum is to the upside, I'm not looking to take a May or June position," Keene said to explain his choice of September options. "However, in the long term, we are in a clear bear channel to the downside, and I think this rally should be sold."
If XOP falls to $28 or below at September expiration, Keene is set to make a 300 percent return.
