Crude oil bulls got slaughtered in the last three months of 2018. Between the start of October and the end of December, the price fell by over 45% from $77.07 to $42.21, sparking fears of a new supply glut.
Then, the selloff’s sudden stop caught nearly everyone by surprise. Yesterday, WTI crude oil reached $52.48. As of this writing, it is hovering around $52 a barrel, 23% above the $42.21 low.
And while catching the entire rally from the bottom can only be attributed to pure luck and bravery, there was a logical and a lot more responsible way to catch the last 15-16%. An Elliott Wave way.
We sent this chart to subscribers on January 2nd, 2019. Crude oil was trading slightly below $45 a barrel, but it was the wave structure of the recent price swings, which caught our attention.
The recovery from $42.21 to $46.83 had all the traits of a five-wave impulse. The following pullback looked like a simple a-b-c zigzag correction with an ending diagonal in wave “c”. In conclusion, there was a 5-3 wave cycle pointing north.
In terms of Elliott Wave analysis, this meant a bottom was already in place at $42.21 and higher levels can be expected in wave iii). Given the big picture outlook, which is also included in our analyses, first targets above $50 were viable.
WTI crude oil bulls reached the $50 mark on January 8th. They conquered $52 the very next day for a 16% rally in just a week.
The case against top/bottom picking
Inexperienced traders often try to catch a move in its entirety. They try to guess where the top or the bottom would form and open a position right away.
The problem with this approach is that when you are trying to catch a falling knife, you inevitably catch it in the wrong place. Nobody can catch all the swings, even Elliott Wave analysts. The analysis can often identify the possible reversal area, but never the exact point of the reversal.
That is why picking tops/bottoms is never recommended. On the other hand, once a bottom is in place, as it was in crude oil on January 2nd, the situation becomes a lot less risky and the profit potential is still good.
Buying crude oil near $42.20 would have led to a bigger profit, but the decision would have been based on hope, not analysis. The price could just as easily have gone to $40 or $38. And trading on hopes and hunches is not the way to long-term success in the markets.
What will Crude Oil bring next week? That is the subject of discussion in our next EW PRO analyses due out late Sunday!