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How Price Action in Energy ETF Preceded Sell-Off in Crude Oil

Price of U.S. West Texas Intermediate (WTI) crude futures breaks below "big downside hurdle"

by Bob Stokes
Updated: July 05, 2017

If you're a trader, you know there are basic things to consider about a financial market before putting your capital at risk.

Of course, the most basic is determining whether you are bullish or bearish. The next step is to decide upon a target price level, and conversely, the price at which you'll exit if the market moves against you.

"Sure," you might say, "but how do I determine a market's likely direction, let alone key price levels?"

Well, whether you trade futures, or use another investment vehicle like exchange-traded funds (ETFs), our experience shows that the Elliott wave model can be highly valuable to traders like you.

For example, let's look at the approach EWI's Chief Energy Analyst Steven Craig recently took to analyze oil prices, make forecasts -- and how those forecasts worked out.

Let's start with the chart that Craig showed in the February 2017 Global Market Perspective and his accompanying commentary:

NYMEX Crude Weekly Log Scale

WTI set the high-watermark for its 11-month climb at 55.24 on 2017's very first day of trading and ended it with a bearish daily key reversal. When you combine this with the corrective look of the 26.05 to 55.24 advance (which traveled well into the span of the previous fourth wave at one lesser degree of trend, retraced a little over a 50% of the previous decline in log scale and stretched just beyond the temporary trend channel -- all common characteristics of a fourth wave retracement) and the presence of weekly price/momentum divergence at the top (as minor as it is), we need to respect the possibility that a significant top is in place.

On Feb. 4, just one day after Steve’s bearish analysis published, Barron's had this headline:

Oil Prices Headed Higher in 2017

Even so, the oil market's Elliott wave pattern appeared to suggest that the next significant move was down.

During the following month, U.S. crude was locked in a tight trading range, but the $55.24 January high remained intact.

In the next publication of our Global Market Perspective (March), Craig mentioned the tight trading range of WTI. He also discussed the Energy Select Sector SPDR Fund XLE, an ETF with holdings in energy companies. Here's the March 2017 chart and commentary:

Energy Select Sector SPDR

The recent price action in the energy equities (as represented by the Energy Select Sector SPDR (XLE) paints a bearish picture. The XLE has been in a steady downtrend since registering its peak in late 2016 and has decisively broken trendline support. A break below the 68.83 triangle wave B endpoint would provide additional evidence of a trend reversal. Historically, oil and energy equities have a strong tendency to trend in tandem. Tops and bottoms, however, aren't necessarily concurrent. That said, if the XLE is telling the tale, it's not much of a stretch to think that oil will soon follow.

Keep in mind that XLE was trading at $73.04 when Craig forecast lower prices (indicated by the blue arrow).

By May 25, a CNBC article said:

US crude settles at $48.90, tumbling nearly 5% on disappointment in OPEC's production policy

U.S. West Texas Intermediate (WTI) crude futures ended Thursday's session down $2.46, or 4.8 percent, at $48.90.

The S&P 500 energy sector was trading down nearly 1.8 percent for its worst day since May 4.

But, as you’ve just seen from Craig's earlier analysis, the Elliott wave model – in both WTI and its exchange-traded fund, XLE -- anticipated crude's downward trend months before this "disappointment in OPEC's production policy."

In late June, crude fell as low as $42.05, registering a more than 20% decline for the year – and officially putting it in the bear-market territory. Prices bounced strongly from there – yet, all along, Craig kept warning subscribers that the short-term bounce wouldn’t last. 

On July 5, crude tumbled 4.5% in one day, fulfilling Craig’s short-term “topping” call.

As for crude’s long-term trend, -- in the June Global Market Perspective, Craig showed this updated crude oil chart and said…

Read the rest of this article and see what’s next for crude -- free, right now. Simply follow the fast steps below to see exactly what Steve Craig forecasted for in June 2017.

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