Crude Oil: Don't Fall Victim to the #1 Enemy of Market Forecasting

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Crude Oil: Don't Fall Victim to the #1 Enemy of Market Forecasting
How EWI's Energy Specialty Service uses Elliott analysis to stay ahead of crude oil's biggest turns

By Nico Isaac
Tue, 10 Jul 2012 17:45:00 ET

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What is the number 1 enemy of any market forecaster or trader?

Random glitches in the mechanics of computer trading
Insiders manipulating the system
Erratic outside factors that pull the markets in every which way

Actually, the answer is d. YOU.

Or, more specifically, the inability to master one's emotions. This occurs any time you choose to abandon your trading position just because the mainstream masses are screaming "BUY!" while your technical indicators are saying just the opposite.

Let's take the recent downtrend in crude oil. Back in late April-early May 2012, crude oil prices were orbiting their highest level in 10 months. And, according to the fundamental chorus of experts, oil's path of least resistence was clearly UP. Here, the following news items from the time set the scene:

"Buy Oil on the Dip. Oil Headed to $130" (Reuters)
"Traders brushed off evidence that crude demand in the US remains weak... the ability of crude to post new highs in the face of what appeared to be a bearish EIA report attests to the underlying strength of this price advance." (Associated Press)
"The oil market has evolved into somewhat of a self perpetuating cycle in which new highs beget new buying that forces new highs." (Morning Sentinel)

At the time, EWI's Energy Specialty Service was also looking higher. BUT: We said that any upside potential rested on one condition: Prices had to stay above a key Elliott wave level $101.82. As soon as on May 4 oil broke below $101.82, that turned the Elliott wave trend solidly down -- while the mainstream kept up its bullishly lopsided outcry for oil.

Energy Specialty Service editor Steven Craig prepared subscribers for the bearish outcome in his end-of-day posts on crude oil, excerpted here:

May 2: “At this point, trade below 101.82 won’t bode well for the idea that the decline from the early March peak is done… and an even longer decline would seem likely.”
May 3: “The market’s failure to extend the advance argues for the alternate count… A much deeper decline should lie ahead.”
May 4: "Today's drop below the April low helps validate the count change... Regardless of the short-term iterations, the key point is that substantially lower lows should lie ahead."

In the chart below, you can see how the early-May fear-driven switch over to the bullish masses would have been less-than-ideal in light of the 30% selloff in crude oil to an 18-month low that followed:

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Tags: crude oil, Elliott wave, Elliott Wave trading, fundamental analysis

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