This chart shows crude oil futures price cycle from 2011 until today. We see that crude is in the last wave of the correction, blue wave (5) which has the form of the Ending Diagonal. Wave 5 always needs five micro waves to be considered as complete and in this case crude has only 4 visible waves in the Daily Chart. Since it has the structure of the Ending Diagonal, circle wave iv must not go above circle wave ii (>$50) for this count to be valid.
Crude temporarily bottomed at $26.05 on 11 February 2016 and immediately reversed more that $10 from the bottom. We do not put too much emphasize on the weekly inventories report because they do not affect the long-term price of crude. One of the latest comments made by OPEC officials that crude will go to $50 was the perfect example that wave cycles are ahead of news and news always joins later.
In the next chart (1h), we will analyze why this fast move from the “bottom” does not support the claims that crude bottomed at $26.05.
This 1 Hour crude chart corresponds with the daily red circle iv wave. The only reason why we consider the crude move from the bottom as part of the big corrective wave iv is the fact that crude made a new low with only 3 waves down (see wave (B)) and immediately price jumped in a V-shaped move, a characteristic of wave C in many other occasions.
If crude was to make a permanent bottom it needed to complete a 5-wave structure on the downside according to the Wave Theory. In this case we have a zig-zag corrective structure with 3-3-5 move. Wave (A) has its 3 moves as wave (B) has and wave (C) has created an upward channel and as long as the channel does not break on the downside, price has more room to go up towards $40-$42 to complete the red 5 waves.
Usually, wave 3 extends 162% (1.618) of wave 1 and at the 100% we tend to see the top of wave 3 of 3 as the chart shows (blue wave iii of bigger red wave iii). Also 100% extension level is a very strong resistance point and price stagnates a lot but when it is broken on the upside there are high chances for the 162% price level to be reached.
In order for the upside momentum to continue, crude must not break below $36 and breach the lower bound of the channel. In case that happens, that might signal the top but we are going to wait for the next week to let the market draw the rest of the picture.