Yesterday was an important day for crude oil traders, who have been waiting for OPEC to extend the production cuts in an effort to stabilize crude oil prices, whose recovery from below $30 a barrel still looks very fragile. OPEC countries did not disappoint and announced they have agreed to follow the output-cut deal at least until March, 2018. Surprisingly, instead of celebrating the news by pushing the price of crude oil higher, traders started selling, which resulted in a sharp decline in crude oil price from $51.97 to $48.23.
According to MarketWatch, the news that OPEC will extend the production cuts agreement came out hours ahead of the official announcement, so it was already “priced in”, which is why the market did not react very enthusiastically to it. The media has always been very good at finding logical explanations about everything after it has already happened. But if it was so obvious, why did not they predict the plunge?
Our job, on the other hand, is to help traders prepare for what lies ahead before it is too late, by applying the Elliott Wave Principle on a couple of price charts. The one below, for example, was sent to clients before Monday’s open on May 22, four days ahead of the news.(some marks have been removed for this article)
WTI crude oil closed at $50.86 on Friday, May 19th, and the Elliott Wave analysis suggested that even though it might add another dollar or so, the bulls should not feel very comfortable, because as long as the invalidation level at $53.74 was safe, a bearish reversal should be expected. In addition, the relative strength index allowed us to see that crude oil prices have already entered overbought territory. Today is Friday and the updated chart below shows how the analysis developed.
$53.74 was never put to a test and all traders had to do while OPEC was getting ready to announce its decision was to stick to the plan. Of course, nothing is certain and we cannot say that “we knew this will happen”, but from an Elliott Wave standpoint, this was the most probable outlook.