OIL PRICES…WHERE ARE THEY GOING?

18 April 2017


A FIRSTLINE SECURITIES LIMITED BLOG BY: PHIL

OPENING SALVO

Firstline’s Thrill Mr. Phil, did his Elliot Waves technical analysis of the crude oil commodity market in September 2014 and reported then that while oil was trading over $90 per barrel, there was going to be a collapse in the market and oil prices should fall below $45 per barrel. I need not tell you how hearty a laugh most of us had back then. The rest is history. Here he goes again!

Before giving my current view, I shall provide a very brief background to the technical analysis technique used to analyse the crude oil market.

 

WHAT IS TECHNICAL ANALYSIS? HOW IS IT DIFFERENT FROM FUNDAMENTAL ANALYSIS?

Briefly, Technical Analysis is a method of evaluating time series of prices by relying on market data, such as charts of price and volume, to help predict future market trends. Investors who rely on technical analysts strive to predict the future prices by looking at its historical prices and other trading parameters.

Elliott Wave analysis and technical analysis differ from fundamental analysis in that fundamental analysis relies on the belief that markets and the people trading them are rational. However, practitioners of the Elliot Wave theory¬†believe that ‚ÄĒ as human beings ‚ÄĒ investors and traders are not rational, rather they follow similar ‚Äúpaths‚ÄĚ referring to this as ‚Äėherding‚Äô, and it is key in the understanding of technical analysis. Technical analysis hinges on the belief that psychology influences trading in a way that enables predicting when a price will rise or fall.

 

THE ELLIOTT WAVE THEORY[1]

The Elliott Wave Theory was created by Ralph Nelson Elliott and first published in his book ‚ÄúThe Wave Principle‚ÄĚ in 1938. He presents a more comprehensive version in his final work ‚ÄúNature‚Äôs Laws: The Secret of the Universe‚ÄĚ in 1946. In this article, we will try and summarise some of the main points of the Wave Theory. Also explained are the Elliott Wave Cycle and the three key Elliott Wave Rules that are considered the pillars of the Wave Principle.

[1] Adapted from Ramki Ramakrishnan publications who is the founder of WaveTimes.com and author of the best selling book ‚ÄúFive Waves to Financial Freedom‚ÄĚ.

THE ELLIOTT WAVE CYCLE

Ralph Elliott found that in an uptrend, or a bull phase of the market, prices went up in five waves. Three of these waves were in the upward direction, and he called these waves ‚Äėimpulse waves‚Äô. Each of the three waves was followed by a downward movement, which he called a ‚Äėcorrective wave‚Äô. Whereas the first and second impulse waves were followed by a smallish correction, the downward move that came after the fifth wave up was a larger move. This was so because this last mentioned downward move corrected not just the preceding impulse wave (the 5th wave) but also the entire five wave sequence.

So to recap, in a bull market, we will see three upward moves and two downward moves. Once the five waves are completed, we will get a correction that will be bigger than the two previous corrections because this downward move corrects not just the fifth wave, but the entire set of five waves up.

If a sequence of five waves plus three waves is completed as above from a significant low, then the completed cycle will represent the first and second waves of a cycle in the time frame of the next higher degree. Every impulse wave is actually made up of a five-wave sequence within itself. Corrective waves are usually made up of three waves, or combinations of three-wave sequences.

 

ELLIOTT WAVE RULES

The Elliott Wave Principle has just three straight forward rules. In a five wave progression,

  1. Wave 2 can never exceed the start of wave 1;
  2. Wave 3 can never be the shortest impulse wave; and
  3. Wave 4 can ‚Äúnever‚ÄĚ overlap wave 1 (i.e. cross into the same price area)

 

Easy enough, right? The trouble is to understand how to use these rules to your advantage. Each asset class poses its own challenges in interpreting and crude oil is absolutely no exception.

 

SHORT TERM OUTLOOK FOR WTI CRUDE OIL PRICES????

Phil‚Äôs Technical Analysis suggests that the bear market trend which started in late June 2014 seems to be nearing its end. The lows of January 2017 may not be its end. I would like to see a retest of that low to be convinced that the major bull market trend is in the making. However, having said this, I think the current market is in short term (8 to 13 month) a pull back to the $60 level. ¬†As at April 5th, 2017, I am seeing the 2nd impulse waves of 3 ‚Äď waves (current trend, its sub-trend and the minor of that sub-trend) all simultaneously developing and consequently do expect a powerful push to the $60 with even a possible overshoot occurring within a month or two. However, a close beneath $50 in the near term may signal a retest of the $47 level before a resumption of the pullback to the $60s.

These views are those of the author’s only and not necessarily those of Firstline Securities Limited.

 

CLOSING THOUGHTS РTIME TO CONSIDER YOUR INVESTING STRATEGIES 

Firstline Securities Limited offers comprehensive coverage of local and international markets with a bias for the energy sector. Firstline offers several unique opportunities to put surplus cash to work either as your asset manager or investment advisor. Please contact us for more details at info@nullfirstlinesecurities.com or at 868.628.1175, we can discuss your investment needs in detail and craft a portfolio that makes sense for you. We look forward to hearing from you.

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