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Oil Above $80: What's Behind the Rally?
Elliott wave patterns in market charts can warn of coming trends ahead of time.
You don't have to squint to see them. Watch most markets long enough and you'll see them everywhere: those moments on a chart when the price first swings wide up and down, then less so, then the swings narrow even more… Then for a while it seems the market is stuck, going only sideways, until -- boom! -- it launches into a wild spike that takes it far, far, and away.
Triangles. That's what Elliotticians call those contracting swings in the charts. In fact, one of the triangle patterns in Elliott wave analysis is called just that: "contracting triangle." It's usually a sideways move comprised of 5 waves, A-B-C-D-E. They most commonly form in 4th waves of a basic 5-wave Elliott wave impulse. And when a triangle ends, the resolution is usually sharp and swift. Here is an idealized diagram:
"Triangles appear to reflect a balance of forces," says Prechter and Frost's Elliott Wave Principle – Key to Market Behavior. "When a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle."
With this in mind, let's take a look at the latest action in crude oil futures. On October 20, oil briefly spiked above $80 a barrel -- the level it's not seen in months. Could you have seen it coming? If you knew about contracting triangles, you could. Here's a chart EWI's intensive Energy Specialty Service posted for subscribers on October 12:
See the contracting triangle in the making? The Energy Specialty Service editor Steven Craig started tracking it back in August. The implication of this pattern was that crude would soon "explode" to the upside -- because triangles usually resolve in the direction of the preceding trend.
And here's how this contracting triangle in crude resolved -- this chart was copied on October 20 from the intraday analysis pages of EWI's Energy Specialty Service:
Contracting triangles are useful and simple chart patterns that do a great job of warning you of impending market breakouts. You can learn more about them in Chapter 1 of The Elliott Wave Principle -- Key to Market Behavior. (You get a free copy of this classic work on Elliott wave analysis with an Energy Specialty Service subscription.)