As oil surges, a death cross may be forming on the chart of energy stocks

Oil may be rocketing to its highest level in more than three years, but an ominous pattern forming in the energy sector has one strategist feeling cautious.

"We're very close to a death cross in the XLE," Matt Maley, equity strategist at MillerTabak, told CNBC's "Trading Nation" on Tuesday. "In the XLE, it is usually, almost always, a very compelling move. … The last time we've had death crosses it's been followed by 10 to 20 percent sell-offs."

A "death cross" charts when a 50-day moving average crosses below a 200-day moving average. The technical indicator can be used to forecast potential downside in an asset.

While Maley says he's not a devotee of the indicator, it does historically portend trouble for energy stocks when it happens in the XLE energy ETF. When the 50-day moving average crossed below the 200-day toward the end of 2014, the XLE ETF did not find a bottom until it had dropped by more than 40 percent.

Energy stocks can avoid such a fate this time if they manage to rally and hold any gains, says Maley.

"If we can get a nice breakout here, we can avoid the cross and that would be quite positive," he said. "I've been quite bullish on the group and think it will play catch up, but that one little technical development is starting to get me a little bit worried."

The XLE's 50-day moving average fell below its 200-day at the beginning of the week. The ETF is currently trading around 4 percent above its 50-day and 3 percent above its 200-day.

Another analyst says the unknowns in the industry are still far too great for him to be optimistic on energy stocks.

"There's too much uncertainty surrounding the sector right now as well as a lot of volatility in general markets due to geopolitical concerns," Michael Bapis, partner and managing director at the Bapis Group at HighTower Advisors, said on "Trading Nation." "That's going to weigh on the oil and the whole industry."

Crude oil prices, and energy stocks, have spiked this week as President Donald Trump considered the degree of U.S. military intervention in the Syrian civil war, especially after an alleged chemcial weapons attack by the government. Separately, Saudi Arabia said it intercepted three ballistic missiles headed to Riyadh on Wednesday in a suspected attack from Yemen's Houthis. The threat of broader contagion from both conflicts in the Middle East could choke off oil supply in the region.

The XLE ETF is up nearly 5 percent this week, while West Texas Intermediate crude has added more than 7 percent. The XLE remains 2 percent lower for the year even though crude has increased 10 percent.


Trades to Watch

Trader Bios


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

Read more