Crude oil prices have been fairly volatile during the last week, but there are indications that a significant low is being made in the present area. There are three viable scenarios for the wave count and path forward, but all three scenarios indicate that a bounce is imminent.
Two of the scenarios are almost equally viable, Each has its technical points of clarity as well as its own minor technical flaws. We have a slight preference for the scenario which we label as "main."
First, we must step back and describe the big picture. We believe oil prices are falling in a protracted A-B-C pattern from the high of 2008. The remarkably steep crash going into 2009 represented wave A, and the lengthy upward/sideways movement into 2014 has been wave B. When the B wave has completed (which may or may not have happened already), then price should fall again in a powerful, impulsive wave C.
Examining what we consider to be the large B wave, the consolidation since 2011 probably should be interpreted as an Elliott wave intermediate triangle. However, pinning down the parameters of that triangle is tricky, and each version has different implications for price movement going into 2016. Happily for traders reading this article, all three of the scenarios suggest an upward trade from nearby that should be possible for several months, perhaps into spring or summer of 2015.
The main scenario counts very well as having a large B-wave triangle... up to the leg we have labeled as wave [c]. However, neither of the final two legs of the triangle, [d] and [e], has the three-segment look that we would like to see in the components of a triangle. On the other hand, they are not clearly impulsive either. Provisionally, we are treating the large triangle as being complete and the downward wave C as having begun.
The main scenario implies that price is now completing the first sub-wave of downward C, and it is readying for a bounce that would represent the second sub-wave of C. We have marked a speculative path for the main scenario on the weekly chart below. The resistance levels at $84.44 and $91.31 were calculated using standard Elliott wave methodology, and the highs and lows were placed to line up with the dominant 42-week cycle. Eventually, the C wave should take price below $60, where it will find a durable low. We have shared more precise downward targets with subscribers.
The next-best technical interpretation is labeled as "Alternate A," and it is in some ways more attractive than our main scenario in terms of form. In that view, the large B-wave triangle is not yet complete, needing a final upward leg [e]. As shown below, the triangle in that scenario counts well, with nicely defined three-segment moves for each of its legs. However, the recent break in price below the lower limit of 75.15 makes this interpretation of a triangle technically invalid. Long years of watching these markets have taught us that price sometimes breaks Elliott wave rules, and this particular breach might be considered minor because of the speed with which price moved back into permissible territory. The week closed with price back inside the triangle's boundaries.
If the first alternate scenario is correct, then price already has begun climbing in the final leg [e] of the triangle. Again, traders reading this can approach the trade in almost the same way they would for the main scenario described earlier. Prominent upward targets for [e] include $88 and $91.31, after which price should begin declining hard in big wave C. For the first alternate scenario, we have drawn a speculative path forward that puts the next high in line with the upcoming cycle high that is due around April 2015. In this scenario, it is too soon to calculate targets for the eventual low, but prices below $70 are a reasonable projection.
We regard the third scenario as somewhat less likely than the first two. The near-term trading implications are similar to what has been described above, although the targets differ. Readers can find a chart and description of the third scenario at our website.