The recent plunge in commodities has seen Gasoline futures tumble --- price is down 20% from its recent highs -- and evidence is mounting there could be more. Here is what we are seeing under the surface:
1. Head and shoulders activated:
The market has broken the neckline of a head and shoulders pattern, which is a pattern with 3 peaks, where the central peak is the highest --- the head. The two lower peaks on either side of this head are the left and right shoulder; now the sizes of these shoulders can vary and in this case, the right shoulder is "shallower" which represents weakness. Also notice that the neckline is upward sloping and as we speak, is broken, thereby activating additional downside. The target is the vertical distance from the head to the neckline, reduced from the point of breakdown --- making $2.93 a possibility based on this pattern alone. This is a "typical" target, it may be met or it may not be. In case of the latter, the failure to meet the downside target will be an indication of "strength" and the resulting rally can be furious.
2. Moving Average support broken:
The 55-day SMA has been a key marker which has led to reactions in the past, particularly during corrections within the prior uptrend. Although the DMA is still rising, any further sideways/downward movement in price will flatten the average out, emboldening the bear.
3. Elliott wave count:
There will be, as there always is, a couple of alternate counts to the preferred EW labelling used here. I believe some sort of a 3rd wave peak occurred at the $3.89 high. From here, a sharp decline ensued which was retraced in its entirety by the subsequent recovery to the $4.32 high. However, this looks more like a B wave. Therefore, we believe the sharp decline from $3.89 to $2.88 was an A.
Now this means we are either doing a Flat (3-3-5) or a Running triangle (3-3-3-3-3) where wave (b) of the triangle exceeds the length of wave (a) of the pattern. The flat could either be an expanded flat or a running flat (rare). If its a running triangle, then more churn is expected between $2.88 and $4.32 --- yes its a large range, but the expanded volatility of the market means this range will continue to hold till the pattern completes itself and leads to a truly trending move.
Regardless of the internals of the count, if the $3.89 high was only a wave 3 high (of some degree), then this correction is a wave 4 and therefore, the door is still open for Gasoline to travel higher in a 5th wave --- once the current bearish trend exhausts itself. We will wait for the market to move and eliminate some viable possibilities and truly zero down on what is really the preferred path. Right now, both the flat and the triangle pattern are valid, so we take it one day at a time.
4. Supports
Some possible areas of support from my several years of experience with the wave theory lie at $3.35 - $3.13 - $2.98
Good luck trading and happy weekend to all. Stay safe.
- Guest Author on behalf of the CMT Association
1. Head and shoulders activated:
The market has broken the neckline of a head and shoulders pattern, which is a pattern with 3 peaks, where the central peak is the highest --- the head. The two lower peaks on either side of this head are the left and right shoulder; now the sizes of these shoulders can vary and in this case, the right shoulder is "shallower" which represents weakness. Also notice that the neckline is upward sloping and as we speak, is broken, thereby activating additional downside. The target is the vertical distance from the head to the neckline, reduced from the point of breakdown --- making $2.93 a possibility based on this pattern alone. This is a "typical" target, it may be met or it may not be. In case of the latter, the failure to meet the downside target will be an indication of "strength" and the resulting rally can be furious.
2. Moving Average support broken:
The 55-day SMA has been a key marker which has led to reactions in the past, particularly during corrections within the prior uptrend. Although the DMA is still rising, any further sideways/downward movement in price will flatten the average out, emboldening the bear.
3. Elliott wave count:
There will be, as there always is, a couple of alternate counts to the preferred EW labelling used here. I believe some sort of a 3rd wave peak occurred at the $3.89 high. From here, a sharp decline ensued which was retraced in its entirety by the subsequent recovery to the $4.32 high. However, this looks more like a B wave. Therefore, we believe the sharp decline from $3.89 to $2.88 was an A.
Now this means we are either doing a Flat (3-3-5) or a Running triangle (3-3-3-3-3) where wave (b) of the triangle exceeds the length of wave (a) of the pattern. The flat could either be an expanded flat or a running flat (rare). If its a running triangle, then more churn is expected between $2.88 and $4.32 --- yes its a large range, but the expanded volatility of the market means this range will continue to hold till the pattern completes itself and leads to a truly trending move.
Regardless of the internals of the count, if the $3.89 high was only a wave 3 high (of some degree), then this correction is a wave 4 and therefore, the door is still open for Gasoline to travel higher in a 5th wave --- once the current bearish trend exhausts itself. We will wait for the market to move and eliminate some viable possibilities and truly zero down on what is really the preferred path. Right now, both the flat and the triangle pattern are valid, so we take it one day at a time.
4. Supports
Some possible areas of support from my several years of experience with the wave theory lie at $3.35 - $3.13 - $2.98
Good luck trading and happy weekend to all. Stay safe.
- Guest Author on behalf of the CMT Association
CMT Association is a global non-profit credentialing body committed to advancing the discipline of Technical Analysis. Improve investment performance and career opportunities: www.cmtassociation.org