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Crude Oil: "Classic Behavior," Explosive Results

Learn what to make of the recent market action in crude oil (and natural gas)

by Alexandra Lienhard
Updated: March 02, 2017

Watch this new interview with Steve Craig, the editor of our Energy Pro Service, and see why the recent choppy, sideways moves in crude oil are "classic behavior" that should lead to an explosive outcome.


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[Editor's note: The text version of the video is below.]

Alexandra Lienhard: As oil prices continue to trade in a tight range, I thought it would be a good time to check in with Steve Craig, Elliott Wave International's Chief Energy Analyst, who is joining me by phone from Oklahoma.

Hi Steve. Now, is this year's tight trading in crude common? Have you seen stretches like this over your career? And if so, how does it tend to resolve?

Steve Craig: Hey, Alex. Yeah. We're witnessing classic corrective behavior in crude. You see it all the time, regardless of the time frame. It doesn't matter if you're looking at a weekly chart, a daily chart, an hourly chart. You get extended periods of choppy sideways price action. And we've certainly been seeing it since the beginning of the year in crude. And it can be frustrating for both bulls and bears alike. But corrections, they always resolve in the direction of the trend at the next higher wave degree. As far as crude goes, the question right now is what is the significance of the last wave peak. It came on January 3rd at $55.24. If it marks the top, then the consolidation will set the stage for further decline. If the larger up trend is still enforced, the consolidation will lead to further advance. Now, I have a bearish opinion, but realistically, the market's done absolutely nothing to validate that view. And of course, the market always has the last word.

AL: And now, the market indeed does always have the last word. So Steve, the volatility in crude has dropped off a cliff the last two to three months. You've been an expert on energy for decades. So what do you look for and what can you suggest subscribers watch for that might give an early warning sign that crude is waking up?

SC: First and foremost, you want to look for a corrective wave structure that can be counted as complete -- zigzags, flats, triangles, etc. But remember, just because you can count a wave structure as complete, that does not make it so. You need to see some confirming evidence.

AL: Now, confirming evidence -- can you elaborate a little bit on that?

SC: There are a number of techniques. And really, it's to each his own, as they say. But initially, I look for a break of trendline and/or structural support or resistance levels that would suggest to me that a counter-trend retracement has ended. If a reversal is indeed underway, then it's common to see impulsive price action in the direction of the larger trend, as well as complimentary technical evidence. This is a very important component of trading successfully, and it's addressed again and again in Trader's Classroom with Jeff Kennedy.

AL: And fortunately for traders, not everything is meandering. Natural gas has been falling aggressively this year, just like you forecasted -- nice call on that, by the way. So looking ahead, what do you see from here?

SC: Well, really, I see more of the same ahead. I just don't see anything at this juncture that would suggest otherwise.

AL: Now, Steve, I know you've answered this before, but given the circumstances in the energy complex, it's worth revisiting. In your view, do crude and natural gas follow their own trajectories, or do they eventually sync up? Because when looking at the direction of natural gas, perhaps it's foreshadowing crude.

SC: I get asked about this a lot. If you overlay their longer term charts, you could make the case that they follow a similar path. But you'll see lengthy stretches where the two commodities diverge. Now, it's important to analyze each one on their own merits and not to assume that one is going to tell the tale for the other. You could be right as rain on analyzing crude, for example, and go broke if you applied that analysis to natural gas. And of course, vice versa.

AL: Steve, thanks as always for taking the time to chat today.

SC: Sure, Alex. Anytime.