The last three weeks have been very interesting for the oil market. First it was Vienna, where OPEC members agreed to cut production by more than a million barrels a day. In response, the price of crude rose sharply to as high as $52.39 by December 5th. Then the bulls took a rest, which allowed oil to decline to $49.59. Soon after that, on Saturday, December 10th, Russia and other non-OPEC countries also agreed to further cut output by 558 000 barrels a day, sending prices to $54.48 on Monday. But instead of continuing higher after the first such deal in 15 years, crude oil lost almost $4 a barrel by December 14th.
Traders, who felt highly optimistic about the price of oil and opened long positions on Monday, must be very disappointed now. Why is oil losing ground even after two production cut deals? Answers in the mainstream media vary from profit-taking to doubts over the production cut deals. Maybe, but our answer is very different. It is called the Elliott Wave Principle. When our clients received their analyses before the markets opened on Monday, December 12th, they saw the following chart included.(some marks have been removed for this article)
The analysis of the 4-hour chart, shown above, suggested oil was likely to exceed the previous high at $52.39 in wave “c” of y). However, instead of joining the bulls, we were expecting a bearish reversal, because of the wave structure of the rally from $42.93. In our opinion, despite the two consecutive deals to cut production, it was not the time to be a bull in the oil market. Four days later we have another reason to thank Ralph Nelson Elliott for discovering the Wave Principle.
The market opened with a bullish gap on Monday, creating the impression that something extraordinary is happening. But experienced analysts know that the markets do not like gaps and have the habit of filling them soon – another reason not to buy.
Trading the news might work from time to time, but we doubt it is a good strategy, because in the long run, the market’s inner forces will always have the upper hand. Just like now.