Wednesday, January 13, 2016

SPX and Crude Oil: Crude Oil Validates Preferred Long-Term Count from 2011

During Monday's session, SPX captured its 1897-1911 target, and this has generated a bounce.  Presumably, this bounce is a fourth wave, though, as discussed previously, we're still unable to rule out the possibility of a large expanded flat (which would be short term bullish, but still intermediate bearish).  So, there's no real change there, and the preferred intermediate count in equities remains bearish.

On another note, VERY long-time readers know that I've stayed consistently bearish on oil for the last five years running.  Back in September of 2011, I published my preferred long-term wave count (updated sporadically since then), with a WIPEOUT target of 25 +/- for oil.  I further wrote that I was favoring that long-term count by a 90% margin, which is as about as bold and certain as you'll ever hear me get about anything (inside or outside the market, for that matter!).  Four and a half years ago, more than a few people thought I was nuts to say that oil was gearing up for a crash, not heading to the moon.  But my technical argument was that oil's 2008 crash was impulsive in structure -- and therefore it had to be the start of a larger correction, not the end of one. 

Here's what I wrote about oil in September 2011, in terms of technical analysis vs. fundamental analysis (keep in mind that, at the time I wrote this, a lot of folks were arguing that we'd already passed "peak oil"):

Crude is one of the few commodities that can be accurately tracked at cycle degree. As such, I believe we topped Supercycle I back in 2008. By the way, despite the current "peak oil" fearmongering, this argues that oil will likely be with us for a long time to come...

We are currently undergoing a correction in Supercycle II. It remains to be seen if this correction will be A-B-C for ALL OF wave II, or if this will be A-B-C of a larger A-B-C... but it doesn't really matter as far as the immediate future is concerned, so we'll drive our gas guzzlers across that bridge when we come to it.

The first thing we notice about this chart is the giant parabolic of wave V and the subsequent wave A crash of 2008. This is fairly typical of commodities as they often form extended fifth waves which retrace quickly. Add that to the fact that this is a crash not of primary degree, but of Supercycle proportions, and you get the picture. The second thing we notice is that wave B appears to be complete, with three farily-clean waves that count nicely in a 5-3-5 pattern. C-down looks like it's in the early phases.

I've been waiting four and a half years for this "against the herd" call to be validated by the market, so you'll have to forgive me for doing a little horn-tooting.  Vindication has finally come with the recent break of the 2009 print low:

Back to the present tense:  From an intermediate standpoint, oil appears to have some fourth and fifth waves to unravel here, thus, due to the size of the overall waves, some very large "backing and filling" price swings may be forthcoming in the not-too-distant future.  Be aware that a large fourth wave does not need to unravel itself in the time shown on the chart above (i.e. -- this chart is not a "time projection") -- fourth waves are known for their complexity, and it would not be unheard of for a complex fourth at this degree of trend to unfold over the course of years instead of months.

In conclusion, SPX captured its target zone, and appears to be unwinding a low-degree fourth wave -- however, the near-term "bull" count for a complex flat is still entirely possible.  Intermediate-term, the decline does not look complete yet.

My prediction for a crash wave in oil that would break the 2009 print low has finally come to pass -- and in this market, too, the chart suggests that the final bottom probably isn't in just yet.  However, be aware that the chart also suggests that a large bounce in oil, and perhaps a long and volatile sideways grind, may be drawing near.  Trade safe.

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