It has been a good week for bullish crude oil traders so far, who saw the price of WTI move from $45.63 on Monday to as high as $48.40 as of this writing on Wednesday. According to MarketWatch, the rally has been driven by two main factors – OPEC and, more importantly, “news of cuts to oil-and-gas exploration spending and signs of a potential slowdown in U.S. output.” Sounds quite logical in retrospect. The only problem is that, unfortunately, trading cannot be conducted in retrospect.
In order to make a profit, traders need to be ahead of the news. And since the news is virtually impossible to predict, they need a method, which helps them decipher the market’s reaction to news that is not even out yet. The method best equipped for the job is the Elliott Wave Principle, which we applied to the 4-hour chart of crude oil below, sent to clients before the market open on Monday, July 3rd.(some marks have been removed for this article)
23 days ago we couldn’t have known that the U.S. was going to cut exploration spending and output. However, as Ralph Nelson Elliott once put it, “the habit of the market is to anticipate, not to follow.” Over three weeks ago, the market was already anticipating good news for the oil market. Thanks to the Wave Principle, its bullish intentions were no longer a secret.
As visible, we thought the recovery from the bottom at $42.03 was supposed to evolve into a larger three-wave rally. Once wave a) was complete, a small wave b) pullback was expected, followed by more strength in wave c). The updated chart of crude oil below shows how the analysis played out.
Wave a) topped out at $47.29 on the very next day, July 4th. Then, wave b) dragged the price of crude oil down to $43.63 by July 10th. From then on, the bulls took the wheel again and lifted the price to $48.64 yesterday. It turns out crude has been following the Elliott Wave path the whole time. This week’s advance was startling only to those unaware of the trend. It did not come as a huge surprise to Elliotticians, who have been bullish since the beginning of the month.