This is a follow up from out May 14th post – Crude Oil Futures.
Looking at the daily chart, we can see that after a 3-wave, 62% retracement (A–B–C) move in wave 2 or B of wave 1 or A that occurred within parallel lines, the market experienced a 5-wave move lower, followed by a 3-wave rally (also occurring within parallel lines so far). This should sound off alarm bells of a high probability trade set-up that risks little in comparison to the potential gains if the forecast comes to fruition.
To get a better handle on the risk:reward and actual execution, we need to shorten our time frame and look at the hourly chart.
This is exciting because we can see all the pieces are in place for a completed wave (2) of 3 or C top. In addition, we have major bearish divergence in price and momentum (higher highs in price accompanied by much lower highs in momentum). Like a rubber band getting stretched too far, this almost always results in a snapback of prices and a violent move in the opposite direction.
Because the majority of corrections occur within parallel lines, we will base our execution decisions on price relative to the parallel price channel shown on the hourly chart. A forecast for lower prices would gain confidence with a closing price below the channel line. A closing price above the channel would instill doubt and call for a re-evaluation. A close above the critical resistance level of $66.45 would call for a re-interpetation of the wave count. This is important to identify as it is your defined risk in entering a short position.
Using Elliott Wave guidelines, we can put in some downside targets based on common Fibonacci relationships with their respective waves. Here, we are calling for decisive price action, in wave 3 fashion down to the $54 level and then another wave lower near $50, after a minor pullback. More importantly, this move would reverse the overall long-term trend and set up a bearish scenario that would bring prices down below $40 late this year.
Roadsigns to watch for:
- Price in relation to the parallel channel.
- More divergence in price and momentum
- RSI on the daily chart to fall below the bull market support line of 40.
Bullish Forces in Crude Oil Futures
- Geopolitics in the Middle East
- OPEC+ cuts
- U.S. Economy Seems to be doing well
- IMO 2020 Regulation
- Seasonality Until June
- Supportive Central Bank Policy Recent statements by Federal Reserve officials suggest they are looking to determine the appropriate conditions for introducing an interest-rate cut, though one is not believed to be imminent. Federal Reserve Bank of Chicago President Charles Evans stated last week that a prolonged period of inflation below 2% would imply that “our setting of monetary policy is actually restrictive, and we need to make an adjustment down in the funds rate.”
Bearish Forces in Crude Oil Futures:
- U.S. Production
- Russian Talking of Turning On Spigots Again
- Global Manufacturing Is Down
Crude Oil Buyer’s Game plan:
- Identify and understand your risk in the market
- Identify and understand the trend(s) of the market
- Create a plan that limits risk but allows for increased margins in the right situation
- Identify the markers of execution (indicators)–what will force me to act, or not act
- Unless there is a large fundamental shift, stick to your plan.
A well thought out plan that is adhered to will reduce the stress in the decision-making aspects of your job. With reduced stress comes better future decisions.