Brent crude has another 10% on the downside

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.

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Click here for a larger and more detailed chart.

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Clearly, Brent crude oil seems to have followed the path anticipated by Elliott Wave Theory. As you would have observed from the enlarged chart, my target for the down move lies at $79.92, which is actually the top of the first wave of the extended fifth. However, if you are a treasurer of a company that is exposed to oil price movements, I would recommend that you put on hedges starting from the time when Brent approaches the $82.80 levels. If you are a trader, and are running a short position, you too should start taking profits around these early supports.

There are a variety of ways you can express a bearish view from the current levels. For example, you have funds to choose from such as the PowerShares DB Crude Oil Short ETN SZO �as well as the inverse and leveraged PowerShares DB Crude Oil Double Short ETN DTO . If you are more aggressive, you will look at some stocks in the oil-related sector, and see how they would be impacted by a lower oil price: Exxon Mobil Corporation XOM , British Petroleum PLC BP �and Chevron Corporation CVX �are three examples.

I will of course revisit the charts once Brent crude approaches our targets. In the meantime, if you would like to see how I have used Elliott Wave analysis on other commodities ( including Light crude oil, which incidentally is headed lower too) please stop by at my other blog WaveTimes.