Trader who correctly called last oil bear market sees crude falling into $30s

Oil fell over 2 percent on Tuesday and officially entered bear market territory, a drop that has trader Todd Gordon betting on a bigger drop for the embattled energy sector.

The TradingAnalysis.com founder had previously called for oil to fall to $26, a prediction that came true in February of 2016. Now Gordon sees oil falling back into the $30s, levels unseen since last April.

Gordon turns to the charts to prove his point. On a chart of the United States Oil Fund (USO), which somewhat tracks crude oil, the trader points to how USO had held “support” at just around $9 since last August, but the recent crude crush has taken the ETF below that level.

“As you can see, we’re broken a pretty good support level right around the $9 region, which equates to about $44 in crude oil,” he said Tuesday on CNBC’s “Trading Nation.” “And it looks like the downtrend should continue, bringing us down into the lower $8 area in USO.”

“[That equates to] about $38 to $35 in crude oil,” he added. If oil were to reach $35, that would translate into a further 19 percent plunge from Tuesday’s levels.

Of course, such an event would be bad news for energy stocks. Oil’s 19 percent drop this year has dragged energy shares down by more than 13 percent. To determine how low the sector could go, Gordon looks at a long-term chart of XLE, the ETF tracking energy stocks.

“The technical damage isn’t quite as severe, but it looks like the energy stocks could play a little bit of catch up here as you go down and test the lower $60 level,” he said. “[This means that energy stocks could touch] the lows of this time last year.”

In order to protect himself from the drop, Gordon is buying the July monthly 65-strike put and selling the July monthly 60-strike put for $1.25 total, or $125 per options spread. This means that should Gordon’s prediction play out and XLE close below $60 on July 21, he is set to make a maximum reward of $375.

In order for Gordon to make any money at all on the trade, XLE would only have to close below $63.75 on July 21 expiration. If it closes above $65, he will lose the entire premium paid.

Tuesday’s drop in oil took the commodity to its lowest levels since November and down over 21 percent from its 52-week high, beyond the 20 percent threshold that is sometimes used to determine whether an asset is in a “bear market.”