Today we’ll take a closer look at our Elliott wave count for light sweet crude. Again, we do this to provide the Context of what a market “might do” or is likely to do. But, once we’ve gained some perspective, and formed an opinion, it’s time to do an analysis of Momentum, in Trader Skillset’s case we use RSI. The final step in our three-step process is to confirm Context and Momentum with an actual Signal. Let’s take a look at the wave count.
What’s clear about oil is that the action has stalled in sideways action since the 2011 high. In addition, the action up from the 2009 low is in three waves A, B and C where waves A and C are nearly equal, which is very typical in a zigzag correction. So, we’ve labeled the weekly chart as a “triple three” combination, with a zigzag for (W), double zigzag down for (X) and a triangle for (Y) (Although, the alternate count is close to 50% likely.) It’s also interesting to note that RSI diverged in a bearish manner into the September ’14 top, and has since fallen apart to the downside. Such action is indicative of a “kick-off” move to the downside, which is also indicated by the five wave move down for 1 (shown below).
Thursday’s reversal either is the end of wave 1, or it will end with one more small push to the downside; and, we should now look for a 50% retracement back towards the 98 level. Should that bounce take the form of three waves, we’ll then be looking for a bearish signal to get bearish for wave 3 down. But, beware the alternate count and make sure there’s bearish Momentum and an actual Signal at the wave 2 high, due to the very valid alternate count.
Shorter term traders should wait for follow through above Thursday’s high before believing the candlestick hammer reversal pattern. Especially since two equal waves down from $108 is slightly below current levels at $$86. After follow through, look for a minimum bounce into the extreme of the prior fourth wave extreme and .382 retracement near $95. The reason we mention that “counter trend” idea is threefold.
- Five down possibly complete with bullish hammer candle Thursday – At minimum we should see further upside corrective action, at least while Thursday’s low holds. The larger trend is likely down, but not until some upside relief is seen.
- Bullish divergence – We do have a bullish divergence on daily RSI, which also supports the idea that today’s decline was a fifth wave, and likely not an extension lower. However, there’s no bullish divergence on the weekly chart into this week’s low, which means we could see further downside action before the decline from $108 is complete.
- Bullish alternate count – We can’t ignore the possibility that wave ((B)) may morph into something larger to the upside. A mentor of mine (who happened to work for a hedge fund billionaire) often says, if there’s a triangle, and the market fails to follow through, you need to flip the triangle over. In this particular case, we can label the triangle as wave (X) with an upside (Y) to take prices towards the $125 area before bears reclaim control.
So, what’s our timeframe for this wave 2 bounce? Since wave 1 lasted 3 1/2 months, we should expect to spend most of October in wave 2. We’ll review this market should something substantial happen, since crude is a such a GDP sensitive commodity which has implications for many other markets.
Until then, Happy Trading.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.