Oil to Fall More Than 30%, Bay Crest Says: Technical Analysis

(Bloomberg) -- Crude oil is set to drop more than 30 percent in the next three to five months, New York-based broker Bay Crest Partners LLC said, using Elliot Wave analysis. Crude’s 61 percent rally this year is a “corrective, counter-trend” movement that will dissipate before prices exceed $76 a barrel on the New York Mercantile Exchange, Bay Crest said. Oil will slump to between $48 and $50 a barrel, and then potentially drop further to $25, the broker said.“This whole rally which people are taking as the start of a new bull run is just a corrective move that will fail between $72 and $76,” Bay Crest’s director of technical research Christian Bendixen said in an interview from New York. “We’re very confident we’ll sell off to at least $48 to $50.”

Bay Crest predicted on March 24 that crude would rise to a “$72 to $76 resistance area.” The $76 a barrel threshold is equal to 38.2 percent of the drop from $147.27 to oil’s four- year low of $32.40 on Dec. 19. The importance of the 38.2 percent level is based on the ratio, known as the golden mean, between numbers in the Fibonacci sequence.In Elliot Wave theory, prices follow either impulsive moves that describe an underlying trend, or corrective moves that work against it. Oil’s plunge from its record high of $147.27 a barrel last July to $32.40 in December was an impulsive move, and the subsequent recovery has been corrective, Bay Crest said.
Oil futures for July delivery rose to a seven-month high of $72.30 barrel in New York trading today.Once the corrective phase ends at $76, the impulsive move will resume and take prices towards $50 to $48, a “confluence of support” that includes a major low in 2007, Bendixen said.

‘Three Waves’
“Major corrections happen in three waves,” Bay Crest’s Bendixen added. “A sell-off to $48 opens the door to $25 by the end of this year or March 2010.” Oil is unlikely to fall below $25 a barrel as “there’s a massive area of long-term support at that level, which prevailed in the 1990s,” Bendixen said. Crude will begin a “new cyclical uptrend” once the move towards $25 has been completed, he said.The wave theory was developed in the 1930s by accountant Ralph Nelson Elliott and used by former Merrill Lynch & Co. analyst Robert Prechter in his recommendation to sell equities before the October 1987 crash.Elliot’s theories held that markets swings, or waves, follow a predictable structure. The pattern is determined by the collective psychology of the people buying and selling.