By Ramki Ramakrishnan
The speed with which Brent crude oil sold off caught quite a few traders and hedgers off-guard, leading them to wonder, “Can this really be happening?!”
In my nearly 30 years of dealing with the markets, I have seen one particular Elliott Wave signal that works time and time again. And what is happening with Brent is just what that signal anticipated.
According to the Elliott Wave Theory, when a five wave movement in a trend is completed, we should expect a correction. However, when the fifth wave happens to be an extended wave (i.e. a wave that traveled a relatively longer distance than is usual), we should sit up and take notice.
This is because such a move signals three things. First, the ensuing correction will be dramatic. Second, the extended wave could experience what is known as a 'double retracement'. And third, the sell off will have as its target a price level in the region of the minor wave 2 within the extension.
Take a look at the chart below where I have labeled the five waves for your convenience. The fifth wave is longer than wave 1 and wave 3, the other two 'impulse' waves in the sequence, and has traveled a distance equal to 123.6% (a key ratio!) of the move from points 0 to 3.
