It has been an eventful week for crude oil traders. On Wednesday, January 16th, the EIA revealed that inventories have decreased by 2.7 million barrels from the previous week. In the same time, it became clear that U.S. oil production rose to a record high of 11.9 million barrels per day.
The first piece of data is bullish for the price of crude oil. Inventories down means less supply, which in turn, should lead to higher prices. The second piece of information, on the other hand, is definitely bearish for crude oil prices. Higher output means more supply, which leads to lower prices.
If, after reading the report by the Energy Information Administration you still had no clue about where the price of crude oil was going next, you are not alone. We too have problems extracting any useful information from a report which is both bullish and bearish for oil at the same time.
Elliott Wave Analysis Solves the Crude Oil Riddle
Fortunately, we have something else to rely on. It is called Elliott Wave analysis and it helped us prepare for what WTI crude oil was going to do days in advance. The chart below was sent to our subscribers before the market opened on Monday, January 14th.
The Elliott Wave principle states that market movements form repetitive patterns, called waves. The price draws five-wave patterns in the direction of the trend and three-wave patterns against it.
As visible, a week ago (and three days before the EIA report) we thought crude oil was about to decline in wave iv of 3 and then rise to a new high in wave v of 3, sort of like an Elliott Wave push-up. Crude oil’s rally from $42.21 was there for everyone to see, but hardly anyone put what they saw in an Elliott Wave context.
While most were simply waiting for the next oil-related piece of news to hit the headlines, crude oil was busy following the Elliott Wave path.
Wave iv dragged the price to $50.36 a barrel on Monday, but the bears’ ambitions were destined to failure. The market closed at $53.81 on Friday, higher than the top of wave iii at $53.29.
Contrary to popular belief, psychology plays a much bigger role in market behavior than the news does. In a sense, the market anticipates the news, instead of reacting to it.
In that case, it was hardly even possible to draw a meaningful conclusion about the direction of crude oil prices from the EIA report. But it didn’t matter, because the market had already made up its mind several days in advance. And it left some Elliott Wave signs on the charts for those who know what to look for.