When people ask us what we think about Fibonacci, we say we like fibonacci pasta. When they ask us if we count waves, we say yes, but only when we are at the beach.
However, many analysts use Fibonacci Retracements and wave cycles to predict when a trend has reversed. In its technical analysis outlook for Q4, Reuters calls a major bottom for oil prices, based on their analysis of waves and Fibonacci retracements.
Their outlook basically suggests that the current rally in oil prices will likely extend since prices have completed a 5-wave cycle. Moreover, a Fibonacci retracement analysis on the down trend suggests that the strength and duration of the last rally have confirmed a reversal.
Although the analysis seems very thoughtful, the fact that it’s relying on “magic” numbers makes us very skeptical. In addition, we just don’t believe in forecasting the future, whether it’s through fundamental analysis or technical analysis.
The author could get it right, the precipitous fall in oil prices might be over. However, it wouldn’t be because of the wave theory… a less oversupplied market and a recovery in China are factors that could trigger a rally but neither seems to have happened yet. There is a long list of bearish factors that haven’t vanished from the market, whether related to OPEC oversupply, surges in inventories, or weak oil demand.
While commodities keep trending down and price drivers point downward as well, unlike Reuters’ technical analysis, we don’t rule out the possibility of further price declines in oil, and we will take the risk of being contrarian to wave theory and Fibonacci.