A Short and Long Term Look at Crude Oil

Jan 5, 2009: 11:19 AM CST

A couple of readers have asked me to take a look at current Crude Oil structure and what might be ahead.  Let’s do so both on the daily chart, and then see a full Elliott Wave Count with an interesting twist on the Monthly Chart.

Crude Oil ($WTIC) Daily:

Probably the first thing that jumps off the chart is the strength and relentlessness of the current downtrend – price has barely made any meaningful counter-retracement at all.

We’re currently in a counter-trend retracement which could be of great interest, particularly if buyers can continue to push price higher.  Price has finally broken above resistance via the falling 20 day EMA, and it will be critical for buyers to hold this level (around $45) and push for a test of the falling 50 day EMA around $55 to see what sort of strength remains in the short-term.  Breaking above $55 would have crucial short and long term significance as it would likely trigger an official trend reversal on the daily chart.

The second thing that should leap off the chart at you is the multi-swing positive momentum divergence that has been in place since mid-October.  This is hinting that the ‘price rubber band’ is being stretched and will snap back perhaps forcefully when the buyers step back in.  Or it could be interpreted as the sellers are losing strength – though they continue to push price to new lows, they do so with less ‘conviction’ each time, meaning they may be using all their ‘fuel.’

Continue to watch the $45 to $55 level very closely and let’s see when this divergence will work itself off (to the upside).  Now let’s pull back to the Monthly Chart for perspective.

Crude Oil ($WTIC) Monthly:

The striking thing about this chart is that we have a full 5-wave confirmed Elliott Wave impulse beginning with the 1999 bottom (crude ‘flatlined’ prior to that).  We see an exemplary 5-wave structure that could have been used as an ideal or textbook example for a course describing the Elliott Wave Principle.

If the above count is correct, then odds are we have just completed the “A” massive corrective wave and are now embarking on a possible “B” up wave which could – in theory – take us to the $70 level, but let’s not get too far ahead of ourselves.

Pause a moment and reflect on the absolute price damage that was done in the recent sell-off from $140 to $40 during six months of relentless selling – that is highly abnormal and perhaps is an example of Nassim Taleb’s Black Swan (I highly recommend reading this book if you have not done so already) once-in-a-lifetime price declines that confounded statisticians and risk-managers (many hedge fund strategies ‘bet’ on reversion to the mean, so they continued to buy aggressively as price continued its brutal slide, wiping out some firms).

Ultimately, price found support – so far – at the rising 200 month SMA which was quite remarkable that a reversal occurred right at that price level.  We would expect $35 to be very strong support and would expect higher prices based on this structure, and though it would be surprising if Crude breaks the $35 level, it certainly would not be out of the realm of possibilities.

Continue to study these charts for additional insights on possibilities ahead for the future.

Corey Rosenbloom
Afraid to Trade.com

19 Comments

19 Responses to “A Short and Long Term Look at Crude Oil”

  1. Anonymous Says:

    ” $140 to $40 during six months of relentless selling – that is highly abnormal ”
    why is the selling from $140 to $40 abnormal? The price has spent more time at $40 then at $140. I would say the abnormal is $140.

  2. Corey Rosenbloom Says:

    Anon,

    It’s abnormal in the magnitude of descent. Usually price moves in rhythmic waves up and down… well more up than down – price tends to fall much quicker than it rises – but it’s unusual for this steep of a drop to occur in such compressed time.

    We would have expected some sort of support at least at one of the Fibonacci zones, or at the peak of Wave 3 on the monthly chart – none of it occurred.

    But you do bring up a good point. Price perhaps has returned to the long-term mean (average) while others were expecting it to return to a shorter-term average.

  3. dacian Says:

    Anon, it is abnormal from a fundamental point of view to have it at 140 with a recession ahead, I agree. I think the abnormality is on the move (I know almost nothing on technicals); it dropped with no pause, which is quite abnormal for a bear market (even in oil). This proves in my opinion just how intense the speculation was here; like Nasdaq back in 2000.

  4. dacian Says:

    Well, Corey typed faster than me 🙂

  5. Corey Rosenbloom Says:

    Dacian,

    Excellent comparison! The NASDAQ ran up so much but then fell 80% over the next year or so, but even it formed a “Spike and Ledge” pattern on the way down – even it retraced a comfortable bit before its steady and lengthy demise.

    I remember reading a report from a very skilled and renowned market technician that oil was certain to go to $250 if not beyond. I didn’t believe that at all but there was a general sense that $150 was inevitable and that $200 would perhaps come before long.

    It was puzzling to me as well with the Recession ahead (remember when it was unacceptable to use the word “Recession” earlier this year?) that oil could possibly go that high. One, it would destroy what remained of the economy and two people would eventually stop buying it, particularly if lay-offs continued to increase (no job, no money, no gas).

    Ultimately, it turned out perhaps to be a ‘bubble’ and once price cracked, it never looked back.

    I still can’t believe how fast and far price fell.

  6. Anonymous Says:

    To add a little more to the Oil commentary… Speculation was high. A report showed that the demand for oil contracts by speculators equaled the demand of China. MYMEX Oil is a ~10:1 leveraged market that had a large hedge fund presence. Like any good bubble there were compelling stories seducing everyone into buying (peak oil, BRIC country growth, etc). In fact it was perceived to be risky NOT to be long some sort of oil exposure – i.e. as we reach peak oil, inflation will follow and reduce purchasing power. Therefor invest in oil/commodities and preserve you purchasing power.

    When cracks started to appear many were leverage to the point where they could survive only limited downside movement. Selling begot selling and a cascade ensued. Deleveraging is responsible for the dramatic price movement. Deleveraging cares not for price or value but for survival.

  7. Corey Rosenbloom Says:

    Anon,

    My gosh that’s fascinating. Speculators equaling actual demand for China!? I knew of the highly leveraged positions but never really put a comparison to them. Of course that’s unsustainable and of course it had to collapse with that backdrop.

    I do remember attending a prominent seminar at a 2006 Trader’s Expo entitled “Peak Oil” which basically told you oil was running out and you needed to get long today or else miss out. You’re right – the speaker posed it such that you *had* to be in oil.

    That’s the way the market falls – a sick spiral of stops being triggered which leads to more triggering which leads to more selling. I like your final sentence. Survival.

  8. Chris Johnson Says:

    At some point economic concepts like marginal utility come into play and it looks like $30-40 is that point. At least, that’s the way I’m trading it. Economists peg the intrinsic value of oil between $50-80. I don’t know all the details but so far it’s been a good trade for me. Never know what happens for sure, but if there is any kind of chart built by OIL — it could be rally like hell.

  9. Corey Rosenbloom Says:

    Chris,

    I’m with you. I don’t delve into the fundamentals, but I know there’s a logistical or production floor at which price cannot (should not) trade beneath. I thought it was $40 but there were technical reasons behind that but I know crude is not like a stock where it can go to $0. At some point it will be so low that funds, governments, and wealthy individuals will begin buying it – stockpiling it – and thus drive the price higher.

    I am quite bullish crude oil – as a disclaimer – and find it difficult to pass up related ETFs or companies (as a basket).

    Something’s gotta give – as they say.

  10. Paul Says:

    Corey, it’s just a matter of time before Russia, Iran, and Venezuela think up a war somewhere to prop up the price. We are smacked in the middle of one in Gaza where Iran’s involvement with Hamas is way too obvious. Not enough people are talking about these geopolitical events which always sneak up and catch us by surprise, hence the move from 35 to 49 in handful of sessions…

  11. Corey Rosenbloom Says:

    True, and I’m surprise price hasn’t spiked on the mere anticipation of conflict escalation.

    All it would take is a little spark to drive oil back to $50 or above which would put negative pressure on the stock market.

  12. vipin Says:

    Dear Corey, excellent analysis of crude.
    Dear Anon, post 6 has excellent information.

    just to add a little more positive news for crude
    1. Renewal of military activity in Niger River Delta can disrupt supplies
    2. China’s top energy official hinted China Might Add to the Strategic Oil Reserve at such low prices

    But I also read in a news report that ”the Feb/June WTI contango has been constantly widening and is closer to $8.5 which is not good news for crude” If anyone can explain this it would be great..

    thanks

  13. dacian Says:

    Hey, the day OPEC announced a huge cut in their output, crude fell by another 7%. This is actually a very bearish development. Investing on a war possibility it makes no sense for me; I mean how I could invest on that?

    So Paul, this is just to remember that any excuse was good a year ago to push prices higher (it was enough to have few Nigerians breaking a pipe to make 3% per day). Today, we have pirates holding huge tankers full of oil just to see prices falling 8% the same day. As Corey says, fundamentals might initiate a move, but everything after is like “Why did we make 5% up today? Ah, oh, I don’t know…wait a sec…oh, there was an explosion in Nigeria; I guess this must be the reason!” No it’s not; it’s psychology and positive sentiment, fear of missing the boat, etc.

    We might see soon the same talk back; war in Gaza will drive prices through stratosphere, which is nonsense. There is no oil in Gaza and the recession is picking steam. Remember in 2000, which was a small recession and China was beginning its decade boom, oil went down to 15$ a barrel!!! Were 8 years ago costs for getting oil out much lower than today? I don’t think so. I read that costs for Aramco (that’s the biggest Saudi oil extractor I guess) to bring up a barrel are 4$; now for Canadian sands are higher, I agree. So looking back in 2000, I think going back to 15$ is still possible; it won’t go there probably and float somewhere around here, but lower prices are possible.

  14. dacian Says:

    Actually, if you think now, those excuses (Nigerian terrorists, new economy for Nasdaq, we will have years of prosperity and eCommerce will change the world, etc.) are most of the time signs of bubbles forming.

  15. Man4urheart Says:

    I feel like no point in analyzing Crude Oil on my own, since my gurur has done it.

    great analysis!

  16. Corey Rosenbloom Says:

    Vipin,

    Contango & Backwardation are two topics I haven’t dealt with all that much since I specialize in front-month Dow-Mini @YM futures. I would suggest looking up in Investopedia or just doing a Google search for additional information.

    But you’re right – there seems to be all sorts of fundamental and news-related issues that should cause a floor or rally in oil.

  17. Corey Rosenbloom Says:

    Dacian,

    You hit on probably the core of the issue. News is wonderful but ultimately it’s supply and demand that move price. Both of which hinge on funds putting on or taking off positions today for what they think price will be in the future, and there are many forces that contribute to, or destabilize the balance.

    As a technician, I tend to focus on price and not so much the reasons why. I try to keep everything into high probability, low risk moves and not so much worry about accuracy (in terms of “I made the right call.”) Over time, edge – developed through price structure – should carry you through.

    Though we need the fundamentals to make the moves, those fundamentals are often inherently unpredictable and so that leaves us only to manage risk… such that when we’re right, we make more money than when we’re wrong.

  18. Corey Rosenbloom Says:

    Man,

    I’m just able to scratch the surface in my posts! There’s so much more I’d love to highlight but I can’t do so for time and space reasons – readers wouldn’t come back if I wrote a 5 page report per chart 🙂

  19. dacian Says:

    Corey, I am a very poor trader and analyst actually. Most of the ideas I take them from blogosphere (well, I tend to make my opinion reading right and left and say, hmmm, that’s more reason here than there and position eventually according to the most reasonable argumentation I find). But I guess there is quite a bit difference between technicians (looking mainly for prices to drive their actions) and (good) analysts. Probably here is a non-ending talk 🙂

    What prices were showing for crude in the first half of 2008 is that there is shortage in oil. But the fundamentals were predicting a recession and lower prices. Prices might be wrong so many time because they are subjective; there is nu ‘right price’. It is all relative to market participants if a security is cheap or not, and they take position (there is sentiment as well, fear missing the rally, etc.).

    In 2008, the signals the prices were sending for crude were wrong; from my point of view, charts should be used mainly for confirming fundamentals, but sometime prices are late showing the way.