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Oil, What Happened Today? What Next?

|Includes:OIL, The United States Oil ETF, LP (USO)

By Chris Diodato

So called "experts" on the major business news stations scrambled this afternoon to explain oil's sudden decline of 4% at 2 P.M. EST. Attempting to find some sort of causality, news anchors rationalized the decline by suggesting that there may have been rumors of the government considering a release of oil from the Strategic Petroleum Reserve (NYSE:SPR). Frankly, I believe that Democrats in office, seeking to maximize their appearance of doing "good will" for extra votes, would not use the SPR this far away from the election.

Watching the price movement today in an Elliott Wave and Gann framework, there is not enough information to confirm a new down trend yet. Below is what I consider the most probable wave count for oil, using USO. The chart for crude is very similar, but much more difficult to see.

This is not a line chart of the data. It is a study called the "Zig-Zag" which only shows price swings resulting in a 1% move or greater. It makes analyzing waves much easier. From this scenario we arrive at three different scenarios, which I'll phrase in "if/then" statements.

  • If USO declines below $34.70, we are in wave 4, which means that USO must not move lower than $33 for the bull trend to stay intact.
  • If USO breaks $33, that means that a larger bear trend is active, and that USO could break down to around $22.50 (unlikely).
  • If USO does not decline below $34.70, but still corrects, then it is a wave "4", which means we get another weak upward push before correcting.

Either way, two of our three scenarios result in a wave four correction. Fours are characterized by "surprising disappointment." I believe that an SPR rumor appearing from smoke is a surprise enough. With wave 2 (July) taking the form of a quick decline, I expect the corrective wave four to be some sort of triangle or rectangle.

Which levels are acting as strong support for oil? For this, I will use the actual chart for crude oil futures. This chart looks very cluttered, so definitely open the larger chart.

Notice the two rectangles, filled in with pink and gray. Each of these levels are confluence zones, or major support areas. The pink level around $93.75 would correspond to an overall wave "4." For those not familiar with the implications, that means that oil is still in a fierce up trend, and will not be ending soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: USO, OIL