With the big oil production meeting in Algeria getting underway, one technician thinks the energy sector has become a "value trap."
Carter Worth, technical analyst at Cornerstone Macro, showed three charts Friday on CNBC's "Options Action" to illustrate why one of the year's most popular sectors for investors may now be a bad trade.
Looking at a chart of crude oil, Worth said he sees a series of lower highs and higher lows, meaning that oil is headed toward an "apex" between resistance and support lines that could serve as a "decision point." But the commodity has what Worth predicts is a 50-50 chance to either break out or break down based on what happens with production, with oil presumably set for a rally should members decide to cut oil production and lessen the ongoing supply glut.
But while oil may still have a chance of breaking out, Worth doesn't have high hopes for the energy sector as a whole. Worth charts the S&P 500 energy sector and finds that relative to the S&P 500, energy stocks are actually underperforming.
Perhaps one of the most disappointing groups has been the drillers. According to Worth, the PHLX oil service index OSX looks to be underperforming the rest of the S&P 500 energy sector by a wider and wider margin as the year goes by. The OSX is currently down about 4.5 percent this year, with the drillers starting to dip again after months of trading in a range. Worth said this is significant because the drillers are the "leading edge" of the energy sector.
"That's where the future is," he said. "[Drilling wells are] where people make 18-month decisions or two-year decisions."
Together, these charts lead Worth to determine that oil and energy stocks have become a "hot mess," leading him to conclude that selling the energy ETF XLE may be the way to go in the next few months.
Oil surged over 3 percent Monday morning in light of the start of the OPEC meeting, reversing Friday's losses after reports that Saudi officials said no deal would result from the talks.
