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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Oil ......... Escalated Quickly, So What Now?

In my last post on oil on Tuesday 3rd March I was laying out the very bullish scenario on oil that had been forming since a series of falling wedges from the 2022 highs on light crude, heating oil and gasoline broke up in June 2025.

The large bottoming patterns on heating oil and gasoline had already started to break up when I wrote that post, and by Sunday night the double bottom on light crude had also broken up, and all of those bottoming patterns had reached target. So what now?

Well I’ve been doing a lot of reading on the Iran conflict over the last few days, and it’s hard to say how long this war might last.

What is certain is that for the war to end Iran will need to agree to end it, and at the time of writing they are refusing to even enter talks about ending this war without guarantees that they will not be attacked again and that the US and Israel will pay them reparations for the recent attacks.

I see three obvious ways that this conflict could end or evolve.

The first of these three main options is that the US knocks out most Iranian oil production and this forces Iran to the table. Knocking out that oil production would be surprisingly easy as 90% of Iran’s oil production flows through Kharg Island, in the Persian Gulf opposite Kuwait. The US has apparently been looking at the possibility of taking over that island and, if that was occupied by the US, the financial consequences could potentially force Iran into talks at a serious disadvantage.

The second of these three main options is that the war continues, but the US allies in the Persian Gulf, Kuwait, Saudi Arabia, Qatar, United Arab Emirates, Oman and perhaps Iraq make a separate peace with Iran. All of these have US bases on their territory and they could either close those bases or agree that the US would not be allowed to attack Iran from these bases.

Iran has offered all of these countries a separate peace if they no longer allow US attacks from their territory and is also offering to open the Strait of Hormuz to their exports.

This is a strong offer for two reasons.

The first is that seven million barrels per day of oil production from these states is currently stopped and much of that which is still happening cannot be exported as it needs to go through the Strait of Hormuz. A lot of natural gas production is also currently shut down and 25% of LNG worldwide is transported through the Strait. This hasn’t had a big effect on natural gas prices in the US yet but if the conflict continues that might well change. It has already had a big effect on natural gas prices in Europe.

The second is that Iran has already attacked the desalinisation plant in Bahrain and is threatening to attack more desalinisation plants. Iran gets about 3% of their water from desalinisation but across these other Gulf States desalinated water is much more important. In terms of drinking water:

• 3% in Iran

• Iraq - Unable to find a number but likely lower than any other gulf state excluding Iran

• 42% in UAE

• 70% in Saudi Arabia

• 86% in Oman

• Over 90% in Kuwait

• Over 90% in Qatar

• Over 90% in Bahrain

The availability of desalinised water is therefore an existential threat in most of these gulf states, excluding Iran and maybe Iraq, and sufficient damage to these plants could risk large areas of these states becoming uninhabitable. It is already clear that the US cannot defend these states from these and other threats and, given that many of these plants draw water from the Persian Gulf, there is also a high risk that a large oil spill in the gulf could also compromise some or all of these desalinisation plants.

There is therefore a large possibility that the Persian Gulf states may make a separate peace with Iran and that peace could involve the removal of all US bases in the region.

If the peace involved a reopening of the Strait of Hormuz and a return to full oil and gas production in the gulf states this would likely calm energy markets soon after.

The third of these three main options is that the war continues for an indefinite period with Iran continuing to attack their neighbours in the Persian Gulf even after the current bombing campaign by the US and Israel ends, and the Strait of Hormuz stays closed.

In that event 10% to 20% of world oil production stays off the market, oil and perhaps natural gas markets spike to new all time highs and perhaps a lot higher and there may be an oil shock comparable or bigger than the oil shock of the early 1970s, triggering recession and inflation throughout the developed world.

If there is also a major interruption to desalinisation in the gulf states then their economies might collapse and trigger a historic refugee crisis, as a large proportion of the Middle East becomes effectively uninhabitable due to water shortages.

Of these three options I think the first and second options are the more likely ones, the third is the disaster scenario that the gulf states will likely go to great lengths to avoid, even at the cost of breaking their current alliances with the US.

With these options in mind, let’s move on to the charts.

On light crude oil (WTIC) the double bottom broke up with a target in the 101-2 area on Thursday 5th March and made target at the futures open on Sunday night. The high on Sunday night was at 119.48 and in my ‘The Bigger Picture’ video recorded and posted shortly after the open I was talking (from about the 22.00 to 27.00 min mark) about the possible alternative routes excluding the Strait of Hormuz and the large strategic oil reserves that meant that after this initial spike up we might see a very sharp correction down on oil, which we then saw of course.

TRIGGER WARNING - I would warn that in that segment I was joking about the possibility that Pete Hegseth might in future consider doing his press conferences in a weightlifter’s posing pouch and oiling his muscles to strike poses as he spoke to the press, so if that image is too much for you then you probably shouldn’t watch this.

On all three of WTIC, HOIL (Heating Oil) and GASO (Gasoline) I noted that the falling wedges from the 2022 highs were all potentially bull flags, so we might soon see retests of those highs. In the case of WTIC that high would be at 126.42, still well short of the 2008 all time high at 147.27.

WTIC monthly chart:

On heating oil (HOIL) the IHS broke up with a target in the 3.47 area and made target at the futures open on Sunday night. The high on Sunday night was at 4.02, short of but not far away from the all time high (and bull flag target) made in 2022 at 4.46.

HOIL weekly chart:

On gasoline (GASO) the double bottom broke up with a target in the 2.913 to 3.092 area and made the lower target at the futures open on Sunday night. The high on Sunday night was at 3.15, still well short of the all time high (and bull flag target) made in 2022 at 4.12.

GASO weekly chart:

Iran has stated an aim of keeping the Strait of Hormuz closed indefinitely (if this conflict continues) with the intention of forcing light crude oil (WTIC) prices up to $200 per barrel. If they can keep the Strait closed and if the conflict continues for months then that is potentially doable. In inflation adjusted terms that wouldn’t even be a new all time high on WTIC, as the current all time high was made in 2008 at $147.27 and cumulative US inflation since then is slightly over 51%, so a new all time high in real terms would be in the $225 area.

I’m hoping that doesn’t happen, as the economic pain across the developed world would be high, and the war might well gut the economies of the US allies in the Persian Gulf. That would be a very high price to pay for whatever the objectives of this war might be, though as Donald Trump noted yesterday, as the US is currently the largest oil producer in the world, that wouldn’t be a price that the US as a whole would be paying, though it would make the current affordability crisis for ordinary US citizens a lot worse of course.

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