by Vadim Pokhlebkin
Updated: March 31, 2017
On Thursday (Mar. 30), for the first time in about three weeks, WTI crude oil again topped the psychologically important price level of $50 a barrel.
The bounce began on Tuesday (March 28). Analysts blamed supply disruptions and OPEC:
"A severe disruption to Libyan oil supplies and comments from officials suggesting OPEC could extend its production cuts deal to the end of the year boosted oil prices on Tuesday." -- CNBC, March 28.
Supply and demand factors do influence crude oil prices -- as with any physical commodity, for that matter. However, crude oil futures are also a financial market, and as such prices are subject to the collective psychology of the market participants.
In other words, it often takes more than a news story for oil traders to start buying or selling. If you watch markets closely, you know that almost always, the day's news is a mixed bag: Some factors appear to be bullish, some bearish. So how do the traders choose which stories to focus on?
They make that choice unconsciously, through something we at EWI call social mood. As a group, traders are (for the lack of a better word) a herd. And a herd is subject to herding -- i.e., collective behavior that may or may not have a rational reason. All humans herd, not just traders. We are creatures whose behavior is governed to a huge degree by collective psychology.
The question then becomes not "What's in the news today?" -- but rather, how do you know in which direction traders' collective psychology will prompt them to move prices?
You'll find answers with Elliott wave analysis. Every "wave" on a price chart shows you changes in market psychology. What's more, those changes are patterned -- and therefore, predictable.
Crude oil gave us a good example of that. On Monday, one day before the news of supply disruption, our Energy Pro Service editor, Steve Craig, told subscribers (partial Elliott wave labels shown):
[Posted On:] March 27, 2017 05:17 PM
-- Searching for an interim low (47.01?). ...my working assumption is that the market is in the midst of a healthy countertrend advance from last week's 47.01 sell-off low. ... Resistance ... is clustered between 50.04 and 51.91.
This chart shows you what happened next:
On Thursday, crude oil hit the intraday high of $50.47, in the resistance range Steve Craig had identified three days earlier.
Without a doubt, the 7% rally in just three days -- and the fact that crude again traded above $50 a barrel -- will raise a lot of hopes for the bulls.
However, Elliott waves are already helping you peek around the next corner. The bulls would be well advised to be cautious.