Elliott wave analysis comes down to this: The ability to identify patterns in price charts.
If you can do that, you can do Elliott. Sometimes it's easy, sometimes not so much -- but because there are only 13 known Elliott wave patterns, you can train yourself to find them fairly quickly in most situations.
Here are just a couple of the advantages Elliott gives you: 1) Once you find a pattern, you know how the prices should progress within it, and 2) You know where the market should go once the pattern ends.
A word of caution: To identify one of those 13 patterns is no guarantee that the market will do what it "should." Experienced traders know that no forecasting method works 100% of the time. But many of them also know that a method like Elliott allows you to narrow down the infinite number of future possibilities to a handful of probabilities. A probability is never a certainty -- but it's much better than a shot in the dark.
With that in mind, let's take a look at the recent price action in crude. Today (June 20), it fell as low as $91.14 a barrel in intraday trading. But just ten days ago, the price hovered at the $102 mark. A 10% drop in a few trading days is a move any trader would love to catch. The question is, could you have seen it coming?
From the standpoint of oil's "fundamentals," the answer is probably no. In fact, on June 9, this bullish item was making the headlines in the energy-trading world:
NEW YORK, June 9 (UPI) -- Crude oil prices climbed close to $102 per barrel Thursday after oil ministers in Vienna could not agree on new quotas and said production would be unchanged.
Yet using Elliott, oil's picture was quite the opposite on June 9. That day Elliott Wave International's Big 5 Traders Flash service, which issues buy/sell recommendations on some of the world's biggest markets, sent out a bearish "flash alert" to subscribers. This chart (not included in the original "flash alert") shows why the move lower was expected:
If you are familiar with Elliott, you can see a textbook contracting triangle Elliott wave pattern in crude's chart above. Triangles are sideways corrective moves labeled ABCDE, where each leg subdivides into three waves. Advanced Elliott wave students know that wave E cannot exceed wave C, otherwise the contracting triangle interpretation of the pattern would be negated. They also know that when triangles end, prices should continue moving in the direction of the previous trend -- down, in this case. An experienced trader could then use all this knowledge to place a very tight stop -- using the end of wave C as the key price level -- to limit the risk.
From the chart above, you can see that on June 9 the contracting triangle was nearing completion. Prices began to fall the next day.
(Editor's Note: If you need active, intraday energy market forecasts and daily updates, consider our intensive Energy Specialty Service.)