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Crude Oil: The Key is, Have a "Preferred" Elliott Wave Count

This is why it's important to keep the bigger market trend in mind

by Alexandra Lienhard
Updated: July 12, 2017

Steve Craig, the editor of our Energy Pro Service, gives you his outlook for crude and explains how Elliott waves helped him stick with a bearish stance towards crude even during the recent periods of short-term market strength.


Alexandra Lienhard: Today on ElliottWaveTV, I'm talking with Steve Craig, Elliott Wave International's Chief Energy Analyst and editor of EWI's Energy Pro Service. Hi Steve, it's good to talk with you. Now since the peak in January, crude has experienced four strong upside moves that have ultimately proved to be counter-trend. So I'm curious Steve, what was it about each of these moves that allowed you to remain bearish despite the strong upticks?

Steve Craig: Well it boils down to a high confidence wave count, and that comes through rigorous market analysis. Now any Elliottician worth his or her salt should be able to identify two or three plausible wave counts that follow the general tenets of the Wave Principle. That point, the analyst must decide which interpretation follows the most rules and guidelines, and then rank it above the others. In Elliott terminology, it's called the preferred wave count, and it shapes the framework for future expectations. So going all the way back to the record price peak in 2008, we've had a general idea of what to expect going forward. And that's for a substantial bear market decline. Since it doesn't count well as being complete, we can stick with the bearish stance during periods of market strength.

AL: And based off your experience in the energy markets, what kind of signs do you look for that help you differentiate between a correction higher from a trend change to the top side?

SC: It's about the wave structure at the next higher degree of trend. So using crude as an example, the rally from the 2016 low, which was around $26 a barrel, through the 55.24 top in early 2017, there are three distinct lags. Now it can be counted as part, which is my working assumption. Or all of a corrective advance within the larger downtrend. Either way though, a substantial decline should follow. This means that rallies within the developing downtrend should be corrective in nature, and follow the rules and guidelines of the Wave Principle. As long as that holds true, we can remain confident in a bearish outlook. If the market were to deviate from expectations, then we'd have to entertain alternate wave counts, including the possibility that we've seen a more substantial trend change.

AL: And now rig counts, supply, OPEC cuts; While you've said that these things don't drive the markets, do you watch the general reaction to these releases to help determine counter-trend moves versus trending moves?

SC: As an energy analyst, I'm always curious about the supposed cause and effect assigned by the financial media. But I don't factor it into my analysis. Nobody knows, for example, what the next inventory report will say, or what the next OPEC pronouncement might be, or when the next piece of the fundamental puzzle will fall into place. But you can always count on a rational explanation for a coincident price move from the media. Now I can't back this up statistically, but it's been my observation over the years that price moves credited to breaking news during periods of market advance, or conversely bullish news release during market declines. It's often fleeting. In other words, you tend to get knee-jerk reaction to news that runs contrary to the prevailing price trends. News aligned with the developing trend tends to just propel it farther along. The key point is that news driven price reactions fit into the larger wave count, whether it's clear at the time or not.

AL: And now, Steve, heating oil, and a little less so RBOB, has also seen strong upticks this year that have proven to ultimately be corrections. Do you look at these markets in a similar way and does the greater trend of crude oil influence these markets or do they generally speaking, march to the beat of their own drum?

SC: Tops and bottoms may not be concurrent, so it's important to analyze each market on its own merits. Generally speaking though, heat and unleaded tend to ebb and flow along with crude. You could say that they're the tail to crude's dog.

AL: Steve, thanks as always for offering these insights.

SC: Sure, Alex.

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