There Is No 'I' in 'TACO'

The Iran War and the US equity markets have reached an interesting stage and I am watching with great interest to see what happens next. I’ll be reviewing the setup on equities here mainly but first I’ll review where we seem to be on the Iran war.

I was saying in my last post on Thursday 12 March that Trump had a problem in this crisis in that if he wanted to TACO here, likely by declaring victory, withdrawing US forces and moving on to something else, then the problem was that this would necessarily require some kind of agreement with Iran, and Iran, under new, younger and much angrier management, was showing no interest in talking.

That’s still the case as far as I can tell, with Iran insisting that hostilities will only cease when the US close all their bases in the Persian Gulf, and agree to pay reparations. That seems unlikely to be an acceptable outcome from the US perspective.

What complicates this further is that it seems that the US allies in the Persian Gulf are now insisting, after many and serious attacks on them by Iran during the war so far, that the US stays and finishes the job, either toppling the Iranian regime or degrading their military capabilities to an extent where they were incapable of further attacks. I understand that they may be threatening, in the event that the US pulls out without this, to end all current agreements to invest in the US and might potentially then also close all the US military bases in the Persian Gulf allies.

Trump and/or Israel have already attacked a desalinization plant in Iran and Iranian oil infrastructure since the war started and Trump was threatening over the weekend on Truth Social to bomb all the civilian power plants in Iran. Iran responded that in that event Iran would bomb the desalinization plants and oil infrastructure in the Persian Gulf States. If they were able to do that on a large scale that might well trigger a major multi-year world energy crisis while making much of the Middle East uninhabitable due to a lack of drinking water.

So the obvious course would be to continue the war until the regime in Iran is toppled and replaced with a friendlier one? Possibly but if that was to involve a ground invasion that would not be at all popular in the US, Iran has a population twice the size of Iraq and a geography that makes it considerably easier to defend than attack, except by air of course. This could develop into a Vietnam scenario.

Iran has been successfully invaded before, as the British and Soviets invaded from two sides and conquered (neutral) Iran in 1941 in a three month campaign, drove out the first Pahlavi Shah and replaced him with his son with the agreement to withdraw after the end of WW2. I would note though that the only other two previous successful wars of conquest against Iran I can find in the last 2700 years since Iran became a recognisable state were the the conquest by Alexander the Great in the 4th century BC and the Islamic Caliphate in the 7th century AD.

There are no obviously good options here, but the consequences if this war goes badly are clear. The worst case is that the world is plunged into an energy crisis that would dwarf the 1970s energy crisis, considerably reduce world growth, and be highly inflationary. That would likely be very bad for US equity indices and asset prices generally.

On to the markets where on the H&S on SPX that I was saying in my last post had broken down with a target in the 6540 area reached target on Friday. I mentioned then that this target was also close to a possible larger H&S neckline in the 6522 area and that was also hit on Friday.

This is a big level on SPX and an area where we could see a possible right shoulder rally before SPX could break down further towards the 4900 - 4950 area. Could we do that in a week? Probably yes, with an ideal right shoulder high target close to short term resistance at the daily middle band, currently in the 6757 area.

SPX daily chart:

There is another very big level being tested here on the weekly chart and that is the 50 week MA. That is currently at 6483, and the low on Friday was a solid test of this MA, which tends to be a key support area in uptrends and a key resistance area in downtrends.

SPX weekly chart:

There is further reason to be looking for a bounce here on QQQ, as the 3sd daily lower band was tested at the low on Friday. This will generally deliver a bounce and, if we see one, the daily bands should widen further to allow further and faster downside, as they already have on SPX, DIA and IWM.

If we see that bounce and then further downside I would note that the large double top setup that I mentioned in my last post has now broken down with a target in the 523-4 area.

QQQ daily chart:

On DIA the H&S that by my last post had already broken down towards a target in the 449.50 area has not yet reached target, but it has reached the 455 area. I have two possible larger H&S necklines on the chart below and they are in the 455 and 451 areas, so the higher neckline has been reached, so a rally from Friday’s low could be a right shoulder forming on a larger H&S that on a break down would look for a target in the 405 area.

Could we make that right shoulder in a week? Probably yes, with an ideal right shoulder high target close to short term resistance at the daily middle band, currently in the 475 area. A daily RSI 5 buy signal also fixed yesterday.

DIA daily chart:

On IWM an H&S has now formed and broke down on Friday with a target in the 216 area. A strong rally after the break down is common but of course a break back over the right shoulder high at 257.19 would invalidate this H&S. A daily RSI 5 buy signal fixed yesterday.

IWM daily chart:

A decent rally this week during Trump’s five day pause could therefore set up all four of these big US equity indices to go a lot lower, and the technical setup for that rally looks very promising.

There are a few potential bumps in the road with this scenario however.

1. There don’t appear to be any actual ongoing talks between the US and Iran.

2. Israel is still actively attacking Iran.

3. Iran is still actively attacking US allies in the Persian Gulf.

4. I am reading this morning that last night the US and Israel attacked a desalinization plant and a civilian gas line in Iran which are precisely the kind of targets which may escalate this war in the worst possible way.

We’ll see how this develops, but overall I am wondering if we may watching the start of a crash scenario developing here where all of these indices retrace the entirety over their moves up from the April low last year.

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