Technical Resistance Builds as Investors Await Iran Clarity
Surprising optimism is meeting reality as energy and inflation risks grow. Here's why I don't like this setup.
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Rolling a boulder uphill
The S&P 500 posted a fourth straight day of gains on Monday despite continued strength in oil. The advance has slowed as resistance at the 200-day simple moving average looms, but the level of optimism has been surprising.
The Deadline
Negotiations with Iran have been difficult, and the likelihood of a deal before President Trump's Tuesday night deadline is slim. Trump has promised "living in Hell" if the Strait of Hormuz isn't reopened by 8 p.m. ET, declaring it "Power Plant Day and Bridge Day, all wrapped up in one."
The market's anticipation of this event has been surprisingly mild. That may be due in part to the potential of another TACO situation where Trump pushes back the deadline because negotiations are advancing. However, impatience is building, and the odds of another delay are lower this time. Market pressure will likely increase if there are no signs of a TACO move Tuesday afternoon.
Oil Is Being Ignored
What is most surprising about the market action is that it is ignoring sticky high oil prices. There is a slight weakening on Tuesday morning, but crude is hovering at its highest level in 10 years.
If Trump's bombing does take place, it will destroy critical Iranian infrastructure used for oil production, which will drive oil prices even higher and prolong the struggle to restore supply.
I'm surprised that investors are not already selling and taking more defensive action. Even if the Iranian situation is resolved to some degree, the economic repercussions are not fully discounted.
The risk of inflationary pressure is still building and bonds are struggling as interest-rate pressures increase. There will be upcoming inflation news this week to add to the concerns.
A Difficult Technical Setup
All of this is happening as the recent bounce runs into significant overhead resistance. I've been hopeful that we'd see a powerful follow-through day after the big bounce last Tuesday, but we have only had low-volume churning so far. It isn't too late for a confirmation day, but it is hard to identify a likely catalyst.
Selling pressure is building Tuesday morning as worries about Trump's 8 p.m. ET deadline intensify. I don't like this technical setup or the news flow, so I'm not going to make any new buys right now. I'll stay focused on managing positions and will be looking for buying opportunities if this bounce fails, and we start to retest lows.
Related: Why the Best Investors Eat Their Own Cooking — and Know Their Ingredients
At the time of publication, Rev Shark had no positions in any securities mentioned.
