I think the oil rally is over, so I’m shorting energy stocks: Trader

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.

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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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