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Crude Oil: More Than Just a Case of "Buy the Rumor, Sell the News"

The "topping" market psychology manifested itself in the price charts

by Vadim Pokhlebkin
Updated: May 26, 2017

The suspense had been building for days.

On May 25, the OPEC and key oil-producing non-OPEC nations met to finalize extended production cuts, in hopes of keeping oil prices from falling. Many analysts believed the meeting was the key event driving the recent rally in crude, as these headlines show:

  • "Crude Oil Still Rising" (Barron's, May 22)
  • "Crude oil prices set to rise as output cuts continue" (The Australian, May 22)
  • "Oil: Prices Rise As OPEC Discusses Deeper Output Cuts" (OilPrice.com, May 19)

Right before the May 25 meeting, WTI crude hit a multi-week of $52 a barrel. And then the bottom fell out.

As the post-meeting statements were released, crude sank more than 5% in a matter of hours. So, analysts said, the cuts weren't deep enough:

"OPEC and Russia have failed to fix the epic oil glut" (CNNMoney, May 26)

Now, if you've been observing market behavior for a while, you could say it's a classic case of "buy the rumor, sell the news." This adage circulates for a reason, after all, as traders noticed this phenomenon a long time ago: As the anticipation of a news event builds, prices often rise. Once the details become available, prices fall. And, sure -- at first blush, the week's price action in crude fits this pattern.

But we believe there was also another pattern at play here -- namely, the Elliott wave pattern.

Leading up to the May 25 OPEC meeting, for days our Energy Pro Service warned that the rally in crude would not be sustained. Here's what we posted on May 24 (partial Elliott wave labels shown):

Posted On: May 24, 2017 04:02 PM

Bottom Line: Searching for a top.

Crude Oil

Crude clipped the 51.68 wave ii objective and while it softened after that, there's nothing yet to suggest that a top is in place. Thursday's OPEC meeting still presents some headline-risk, but regardless of the outcome, the larger downtrend should soon re-emerge.

In fact, three days before the meeting, Steve Craig, Energy Pro Service editor, recorded a video update for subscribers, making a similar bearish case; here's a clip:

 

You can see in this chart what crude oil prices did on May 25:

Crude Oil 2

Today, you can read convincing opinions on both sides of the bull/bear argument for the next move in crude oil prices.

The problem is, almost all of them base their forecast on the supply and demand factors. While they are very important for any commodity, another key factor is traders' collective psychology.

Only Elliott wave patterns show you where it will most likely take prices next.

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