The price of crude oil is approaching the $61 mark helped by U.S.-Iran tensions and a 9.5-million barrel decrease in US inventories. A rally in oil prices might seem easy to explain now, but it wasn’t so obvious a week ago.
On July 3rd, crude was barely holding above $56 a barrel after a decline from $60.26 two days earlier. The huge number of factors contributing to the formation of crude oil prices makes predictions hard for everyone. Elliott Wave analysts are never certain about anything, as well. However, they have one advantage – the ability to identify key price levels to guide them.
The hourly chart of crude oil below was sent to our subscribers as a mid-week update on Wednesday, July 3rd. It revealed the importance of $54.80 for the bulls’ ambitions.
A week ago we thought there was an incomplete five-wave impulse on the hourly chart of WTI crude oil. Waves i-ii-iii-iv were already in place, but wave v up was still missing. When analyzing a possible impulse pattern, traders should keep three rules in mind:
Rule #1: The second wave cannot retrace beyond the starting point of the first wave;
Rule #2: The third wave cannot be shorter than both the first and the fifth wave;
Rule #3: The first and the fourth wave cannot overlap.
In crude oil’s case, wave ii, although very deep, did not breach the starting point of wave i. Wave iii was already longer than wave i. In order for the bulls to survive, wave iv wasn’t supposed to drop below the top of wave i. It was the third rule that helped us identify $54.80 as an invalidation level.
In other words, as long as oil traded above $54.80, long positions with targets above the top of wave iii at $60.26 made sense. As of this writing, WTI crude oil is hovering around $60.70.
Wave iv dragged the price to $56.02. Fortunately, $54.80 survived, leaving the positive outlook for a rally in wave v alive. Soon enough, crude oil took off and didn’t stop until it exceeded the top of wave iii.
Of course, the situation might have went the other way around with the price falling below $54.80 and invalidating the setup. The point is that Elliott Wave setups often come with a specific price level to tell us if we’re wrong. Traders using news-following strategies, on the other hand, don’t have this benefit. They have to come up with their own key levels, which makes the analysis highly subjective.
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