Schrodinger's Strait

In my post on Tuesday 31st March I was saying that the likely best thing that could happen in the Iran War was that the US declares victory and that the war has ended regardless of any input from Iran. This would avoid further escalation and the major economic shock to the world economy that would likely result from longer term disruption to the Strait of Hormuz and likely also the Bab El-Mandeb Strait.

In my post on Wednesday 8th April after Trump declared a ceasefire and accepted talks on the basis of Iran’s ten point plan I posted charts showing bottoming patterns on SPX, QQQ, DIA and IWM that had broken up and those all made their targets last week, with new all time highs on SPX, QQQ and IWM on the back of a ceasefire in Lebanon and numerous statements last week suggesting that a peace deal was close.

That ten point plan from Iran hasn’t changed and is as follows:

1. A guarantee that Iran will not be attacked again.

2. A permanent end to the war, not just a ceasefire.

3. An end to Israeli strikes in Lebanon and against Iranian allies.

4. Lifting of all US sanctions in Iran.

5. Reopening of the Strait of Hormuz with a transit fee of $2 million per ship.

6. Continuation of Iran’s control over the Strait of Hormuz.

7. Acceptance of Iran’s right to enrich uranium for its nuclear program.

8. Compensation for war damages to Iran.

9. Withdrawal of US combat forces from the region.

10. End to all UN and IAEA resolutions targeting Iran.

As I had mentioned then, these conditions for Iran were a lot for the US to swallow, but it appeared on Friday that the US was likely to accept most of these, squeeze out a couple of concessions from Iran, probably on nuclear enrichment and reparations, and declare a victory that to the rest of the world would look like a major defeat for the US, but would avoid the major global crisis that might well follow an escalation of this war.

On Friday the Strait was reopened on Iran’s conditions and some tankers started flowing through the Strait again, paying a toll to Iran for each transit out of the Strait. Trump said that the US blockade of traffic from Iran would continue until the agreement was finalised.

On Saturday Iran closed the Strait again because the US blockade had not yet been lifted and yesterday the US appears to have attacked and taken over a tanker containing goods destined for China. A further ten thousand US troops have been sent to the Middle East. A US team led by Jared Kushner and Steve Witkoff, two people Iran had insisted that they are not prepared to negotiate with, has been sent to Pakistan for talks with Iran today and tomorrow.

This raises some questions:

1. Are Iran prepared to negotiate with Kushner and Witkoff?

2. Were there any actual discussions or agreements last week between the two sides?

3. Are the US prepared to make any real concessions to Iran?

4. Are Iran prepared to make any real concessions to the US?

5. Is the US prepared to escalate this war and risk a global disaster?

Overall this is a dense fog of confusion but two things are obvious. Firstly some traders with amazing prescience are placing trades just before big announcements from Trump, with a short position on oil futures placed twenty minutes before Trump’s peace announcement on Friday morning delivering a profit of over $700 million by the close on Friday.

Secondly if the Iran War escalates from here the all time high retests on SPX, QQQ and IWM last week may all have made the second highs on a series of large double tops. If and when it becomes clear that there is no deal and the war is escalating the reaction from oil and equity markets is likely to be brutal.

In the meantime SPX made the IHS target at 6912 last week and if this is now a much larger double top the target on a sustained break below the late March low at 6316.91 would currently be in the 5485 - 5530 area:

SPX 15min chart:

QQQ made the IHS target at 627.5 last week and if this is now a much larger double top the target on a sustained break below the late March low at 555.60 would currently be in the 461 - 477 area:

QQQ 15min chart:

DIA made the IHS target at 486.25 last week and this is not yet a possible double top setup. This could potentially still be the right shoulder of a large H&S forming and a hard break down from here would be looking for a target in the 395 area:

DIA 15min chart:

IWM made the double bottom target in the 266-8 area last week and if this is now a much larger double top the target on a sustained break below the late March low at 238.69 would currently be in the 203 - 210 area:

IWM 15min chart:

Sometime before the end of April this fog of confusion over the status of the Iran War should clear enough to see what may happen in May. If the war ends then this crisis is over, though the IEA is telling us it will likely take two years to entirely recover from the disruption caused so far. If the war escalates then equities may well go a lot lower than the lows at the end of March.

I am hopeful but doubtful about seeing a negotiated end to this war yet. We’ll see.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.

In The Eye Of The Storm

In my last post on Wednesday last week I was looking at how far the current rally on equities might get, and at the prospects that peace negotiations with Iran might deliver something positive.

I was skeptical about the prospects for a negotiated peace, and the talks in Islamabad on Saturday were abandoned after a day, as there was never really anything to talk about. The ten points that the US had accepted as a basis for negotiation were maximalist demands from Iran that would in effect have been a humiliating surrender by the US, and the alternative proposals from the US team on Saturday were maximalist demands that asked in effect for a humiliating surrender by Iran. The talks never had any realistic chance of success or even progress on this basis.

The key issue for the world economy of course remains the closure of the Strait of Hormuz, and in that respect the situation has now deteriorated. Before the ceasefire only a small number of ships approved by Iran were going through the Strait, and now the US has announced that it will entirely blockade all Iranian ports until Iran allows free passage for all through the Strait of Hormuz. The net effect is that all commercial transit through the Strait of Hormuz has now been stopped by both Iran and the US until further notice.

This raises some questions of course, about whether the US would really attack or confiscate vessels from China, India, Pakistan that were leaving Iranian ports. To do so would of course legally be an act of war against those countries.

In the event that hostilities escalate further then the next obvious move for Iran would be to use their Houthi allies to close the Bab al-Mandab Strait out of the Red Sea:

The Bab al-Mandab Strait isn’t as heavily used as the Strait of Hormuz, mainly because the Houthis have been intermittently firing at shipping there for years, but it has been clear so far in this conflict and the Saudis have been using it as a partial replacement for Hormuz since this war started. If this is closed then millions of barrels a day of oil from Saudi that have managed to keep flowing so far during this war will stop flowing.

You may be wondering whether Saudi could instead send their oil through the Suez Canal and smaller tankers could go that way, but the maximum (Suezmax) size of oil tanker that can go through the Strait is between 120,000 and 180,000 deadweight tonnage (DWT). Most crude oil is carried by Very Large Crude Carriers (VLCC) or Ultra Large Crude Carriers (ULCC), which range from 200,000 to 550,000 DWT, and so are too large to use the Suez Canal.

We already have a major supply shock from this war and there’s not much reason at the moment to think that the war isn’t about to escalate seriously and make that supply shock a lot worse. If that happens the outlook for oil and equity prices will be bleak.

On to the markets where I will review the progress of the bottoming patterns that I was looking at last week on the 15min charts, and the negative divergence that was building over the last two days of last week on the hourly charts.

On SPX an IHS had broken up with a target in the 6912 area, and hasn’t progressed much to the upside since I was looking at this on Wednesday. A decent quality rising wedge has formed from the low suggesting a short term high may be close.

SPX 15min chart:

On QQQ an IHS had broken up with a target in the 627.5 area, and hasn’t progressed much to the upside since I was looking at this on Wednesday. A decent quality rising wedge has formed from the low suggesting a short term high may be close.

QQQ 15min chart:

On DIA an IHS had broken up with a target in the 486.25 area, and hasn’t progressed much to the upside since I was looking at this on Wednesday. A high quality rising channel has formed from the low suggesting a short term high may be close.

DIA 15min chart:

On IWM a double bottom had broken up with a target in the 266-8 area, and hasn’t progressed much to the upside since I was looking at this on Wednesday. A decent quality rising megaphone has formed from the low suggesting a short term high may be close.

IWM 15min chart:

All of these targets are fairly close and with these indices all currently at or close to rally highs day they may all still be hit.

There is a lot of negative divergence on the hourly charts here though, and on the SPX hourly chart below you can see that both RSI 14 and RSI 5 sell signals fixed on Friday.

SPX 60min chart:

I was warning subscribers from Thursday night that hourly sell signals were brewing across the board and other than SPX there are also:

• QQQ - Hourly RSI 14 sell signal brewing, RSI 5 sell signal fixed.

• DIA - Hourly RSI 14 sell signal fixed, RSI 5 sell signal reached target.

• IWM - Hourly RSI 14 and RSI 5 sell signals fixed.

I’m expecting a short term high soon and all these sell signals will likely reach their targets at the 30 area on their respective RSIs. In the absence of any actual good news on the Iran War, and I’m not currently seeing much reason to expect any, we’ll likely be seeing lower lows in the near future.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST, but only for paying subscribers. Other places to find me are my page on the platform previously known as twitter, and my YouTube channel.