Ten days ago, on August 12th, the price of WTI crude oil peeked over the $80 mark. Today, August 22nd, it trades below $72 a barrel, down by over 10% in less than two weekly trading sessions. This drop can easily be explained after-the-fact with the Gaza truce negotiations. Alas, what counts in the market is the ability to actually predict things in advance, since no-one can profit from yesterday’s price moves.
By the time the news has arrived and events have unfolded, it is usually too late to take action, because the market has already reflected upon and absorbed them. Instead, we prefer Elliott Wave analysis. It allows us to get a hint of the market’s intentions before the crowd. This is how we managed to predict the selloff in the price of crude oil ten days ago.
The chart above was included in our Elliott Wave Pro analysis of crude oil, published before the markets opened on Monday, August 12th. The message it carried was all too familiar. The decline from $84.50 to $71.70 had the structure of a five-wave impulse, labeled (i)-(ii)-(iii)-(iv)-(v), where the five sub-waves of (iii) were also visible.
According to the theory, a three-wave correction follows every impulse before the trend can continue. This meant that the recovery from $71.70 was most likely a temporary a-b-c retracement. Once it was over, it would made sense to expect more weakness to a new low. Where exactly the top of wave ‘c’ would form was impossible to tell. It is the habit of successful traders not to try and pick tops and bottoms, but to wait for them to actually take place before opening a trade. By the time we published our Wednesday update of crude oil on August 14th, the top of wave ‘c’ was in already.
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Not only has the bearish reversal taken place, but it happened to occur shortly after the price touched the 61.8% Fibonacci resistance level. This strengthened our conviction that the 5-3 Elliott Wave cycle was complete and it was time for a lot more weakness going forward. Just over a week later now, the updated chart below visualizes how the situation unfolded.
The bears took the wheel and never looked back. On August 21st, they breached the bottom of wave (v), reaching the setup’s initial target. Does this mean it is now time for WTI crude oil head back up again? Not necessarily. In our next Elliott Wave Pro analysis due out over the weekend we’ll put the chart above into big picture context and see if there’s more room for the bears to run or not.
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