Trading Nation

Here's why the worst isn't over for energy stocks, technician says

Here's why these experts say to avoid energy markets

It's been a painful few days for stocks, but one corner of the market has had it even worse.

Energy has plummeted more than 6% to start August, the worst S&P 500 performer and only sector in a bear market. An escalation in the U.S.-China trade war pulled crude oil lower, a sell-off that spilled over into the energy trade.

Ari Wald, head of technical analysis at Oppenheimer, says it will get worse for energy.

"It's a bearish trend and a poor risk-reward," Wald said on CNBC's "Trading Nation" on Monday. "The sector has just not been rewarded when oil rises to the same degree it's been slammed when oil falls."

For example, West Texas crude oil has surged more than 110% since bottoming in 2016. Over that period, the XLE energy ETF has added just 19%.

Exxon Mobil, the largest stock within the sector, also suggests more downside ahead for the entire energy trade, Wald says.

"Exxon Mobil [is] turning lower from the bearish slope of its 200-day moving average. We define that as a resumption of the downtrend," said Wald. "When you've got the biggest stock in the sector acting as that headwind in what is a broad list of bearish trends in this sector, we recommend underweight, avoiding, stay away from energy."

Gina Sanchez, CEO of Chantico Global, agrees that this sector is a no-touch right now.

"The fundamentals look just as bad as the technicals," said Sanchez. "You have growing stockpiles, growing inventories possibly meeting waning demand, and that is just a recipe for disaster."

Commodity investors fear that trade-sparked slowdowns in the U.S. and Chinese economies, the two largest in the world, could suppress demand for oil.

"The problem with the oil industry is it moves very slowly, so it can't really turn on a dime. It's not going to shut off a whole bunch of oil wells just because of a few demand numbers, so this takes time to play out, and inevitably it just means that you just suffer as the market slowly right sizes," she said.

Sanchez adds that a strengthening U.S. dollar against a weakening foreign-exchange environment could also hit crude oil prices. A strong greenback deters foreign buyers from purchasing costlier U.S.-produced and -priced oil.