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Oil Prices and the Ship of Sad Fools
Elliott wave patterns make a case for whether crude oil's century-long bull market is over

By Nico Isaac
Thu, 01 Aug 2013 16:15:00 ET
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Mainstream economic wisdom claims that if you want to know which way the wind (price trend) of a financial market is blowing, hold your finger in the fundamental air. Set your sail in that direction, and wait for the breeze to take you home.

That's the theory.
It is all the more surprising when, in reality, a mighty gale comes in out of nowhere and sends one's investment ship crashing onto the rocky shore.
A prime example of the destructive power of thinking that news moves markets (rather than the true causality: that markets move news and events) comes from the crude oil scrapbook, circa five years ago.
The time is early to mid-2008. The phenomenon known as Peak Oil Panic is alive and well amid a perfect storm of bullish fundamentals, including: protests at petroleum plants across the globe, a gas shortage crisis in the southern United States, and unabated economic turmoil.
Article after article confirms that the runaway price of oil shows no signs of stopping. 
  • “Oil continues to gain momentum amid worries about the global economy …  It is a reflection of a commodity that will still have value if the rest of the financial world comes crumbling down around us.” (Couriermail.com.au) 
  • “Investors bet on $300 oil.” (Financial Times) 
  • “It would be a brave analyst to call the end of the upward momentum in [oil] prices.” (Bloomberg) 
Instead, the runaway price of oil stopped. On July 11, 2008, crude oil peaked and turned, crashing 78% in just five months.
As for a brave analyst calling the end of the upward momentum in prices, we found more than one right here at Elliott Wave International.  We refer to the June 2008 Elliott Wave Financial Forecast. One month before the July 11 crude oil peak, Financial Forecast revealed that the deeply entrenched panic surrounding crude bore the classic marks of a mania on its last legs:
"If there is a fly in our forecast for an imminent break in the economy, it is crude oil prices. The oil chart offers a complete, or nearly complete, bull market pattern. The rally is reaching an end … after which a strong and sustained decline ensues."  
EWI president Robert Prechter quickly provided bearish reinforcement in his June 9 Elliott Wave Theorist:
"I am publishing this issue a bit early in order to alert you to an opportunity developing in the oil market. Oil is due to peak soon and join gold and silver on the downside. One of the greatest commodity tops of all time is due very soon.”  
It's important to understand that the 2008 example was not a one-off. Three years later in 2011, the fundamental backdrop in crude again supported a long-term rising trend. From one news story at the time:
"Increased tensions in the Middle East, growing global demand, falling production, AND the devastating tsunami-led nuclear power plant crisis in Japan all have one energy analyst 'bracing for an oil super spike' -- a price surge that will soon drive crude oil to $220 a barrel."
-- New York Times April 4, 2011
In a familiar misstep, however, oil's much-anticipated super-spike was replaced by a super sell-off in late April. From there, crude oil prices plummeted 34% to a one-year low. This marked the largest quarterly loss for crude oil since the 2008 financial crisis.
As with the 2008 reversal, Prechter was there at crude's 2011 peak to provide an objective lifeline. In his April 2011 Elliott Wave Theorist, he left the downside door open and wrote:
"Oil is back to $103, and a strong bullish consensus has returned. Trade futures.com reported 97% bulls on February 22 and 23, an incredible imbalance of opinion.... A bear on oil today is once again regarded simply as a sad fool who doesn't understand fundamentals. This attitude is once again bearish for oil."
History shows, the sad fool is he or she who doesn't understand that fundamentals are not driving crude oil's long-term price trends. What does drive them is the collective psychology of investors, which unfolds in observable Elliott wave patterns on crude oil's price charts.
This brings us to Prechter's current Elliott Wave Theorist, published July 19, 2013. There, he carves out a full page of analysis with two main objectives: For the near term, he reveals whether the 78% sell-off from the 2008 high represents the full extent of the bear market.
And for the long term, he presents the following chart of the bull market in oil going back 100 years. There, he explains why the recent throw-over and clear Elliott wave structure confirms whether the century-old uptrend is actually young for its age.  
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