Just When You Thought It Was Safe…

If you’ve been under a rock lately, you might be surprised to find oil 10% higher, the world on the brink of a new Gulf War and the stock market not ramping to new highs over the weekend.While higher oil prices are usually a net positive for stocks, this is one of those stark exceptions. Injecting much higher oil and gas prices into an already rocky global economy is not a great recipe for profitability.

The algos are working to hold ES’ “breakout” above its channel top and SMA5 200, but things could change very quickly once the cash market opens. Our analog should get a pretty good shot at playing out today.

continued for members…

First, a few big picture charts…starting with RSI which looks bearish on both a weekly and daily basis for ES and SPX.

There’s also some pretty obvious negative divergence at exactly the same slope as existed between Jul and Dec 2018.

Negative divergence on the weekly chart too.

The SMA200 is just about up to the Aug 5 2822.12 lows. It closed at 2818.52 and has been bumping up by 1-2 about points per day. This has obviously been an important level of both support and resistance for the past year.

A reminder, the 2019 as 2015 analog is still clinging to life, with today as Day 33 if you set Day 0 as July 30 (the yellow day numbers instead of the white.) Obviously a Day 27 decline is completely missing from the 2019 count. But, the potential for a 180-pt collapse has just ratcheted much higher.

VIX popped on the open and, significantly, has not been hammered into submission — at least not yet.

Keep in mind it faces the same kind of C=A we’ve been watching for in SPX.

This would put it at the top of the falling white channel as well as the white .618.

USDJPY has reversed off the white channel top… …and gold has bounced at its channel bottom.

Perhaps a little surprisingly, ZN hasn’t reacted much yet. Note that TNX reached the TL that fits nicely with the Nov 2018 highs.Now on to oil…

CL has broken out of the falling purple channel and is back above its SMA200.But, the damage has been less than many expected……limited, thus far, to a .786 retrace of the April to June drop.RB, which had been clinging to the yellow channel bottom and the purple and white midlines, rebounded to the white channel .786 line and subsequently fell back below its SMA50 and SMA200.

I expect RB will settle back to its former range and will remain on track to post lower lows over the next 6 weeks or so. CL is a little trickier. But, I wouldn’t chase this breakout. I suspect it’ll settle back below its SMA200 and also make lower lows by the end of October.

Many analysts who are more knowledgeable than I am about Middle East geopolitical issues have weighed in on the attacks. I’ll offer my two cents anyway.

Like many, I find it very suspicious that the attack occurred within days of Bolton’s resignation/firing and increased optimism regarding the US-Iran conflict. I’m not a conspiracy theorist; but, I am a skeptic at heart and this thing has an unmistakable odor about it. Given MBS’ track record, would anyone be shocked that it was a false flag operation? And, what about Israel? It wouldn’t be the first time.

There are many parties with conflicting agendas, several of which have an incentive and a history of deception. The one party which seems to me to have the least incentive is the one the US has officially blamed: Iran.

The argument that Iran is trying to increase the pressure on the US and its allies to make a deal doesn’t fly with me. With Bolton gone and Trump seemingly more interested in making a deal, what does Iran have to gain by kicking the hornet’s nest? I don’t buy it.

It doesn’t matter, though, since that’s the path Pompeo and Trump are taking. Unless they back off from that conclusion, it’ll mean war between Iran and Saudi Arabia — a war which will draw the US into the mix as the Saudi’s chief weapon provider and protector.

The first Gulf War in 1990-1991 cost the SPX 20.4% off its most recent highs — losses that were recovered within a month of its conclusion. The Iraq invasion lasted about a month and was actually bullish for SPX — though not so much, of course, for the hundreds of thousands who were killed during the invasion and the still-ongoing aftermath.The relatively minor stock market repercussions (the $2.4 trillion in expenses is another matter) have had the unfortunate effect of encouraging future such military excursions. But, most of the analysis I’ve read indicates that attacking Iran would be much more arduous than attacking Iraq.

One interesting question is how the Saudi Arabia situation might affect the FOMC decision coming up on Wednesday. There’s an argument to make that higher oil and gas prices mean higher inflation and, thus, a more hawkish policy decision. However, the Fed is unlikely to ignore heightened geopolitical risk. So, the 25 bps cut is probably safe.

This raises the question I posed last week of whether a sell-off would be allowed/encouraged in order to increase the odds of dovish Fed action. It still makes sense to me — though the lack of follow-through from the overnight losses isn’t encouraging. It currently looks like the market is ramping higher into the FOMC meeting like it usually does.

So far, it’s been a very tightly controlled decline.