The Wave Tech Database Says a Pullback From Here Is Healthy Not Scary
KR Opinion
Yesterday’s session again showed the kind of headline-driven price action that characterizes this market regime. The aftermarket announcement of a ceasefire caused equity markets to surge nearly three percent, and that momentum carried through the London session overnight, with prices remaining notably buoyant into the next trading day. We dipped toward some support levels around midday, but a late bid kept prices steady into the close. As I have been discussing, the markets now hold a probability range around the 6840 to 6880 level on the index, which you will see reflected in the data sheets below. From a technical perspective, there is very little fuel left for the market to move higher from here. What’s more likely is a stabilization day at minimum, and I expect to see some pullback and rejection from these levels in the broader index markets soon.
The reaction in crude oil was even more revealing. When prices dropped to 91 on the ceasefire news, oil traders quickly snapped up those prices, and we are already seeing the market attempt to push back toward 100. The overall outlook remains bullish for several days ahead, and the reason is clear. The ceasefire may have halted active hostilities, but it has not reversed the disruption. The Strait of Hormuz remains closed, and the bottleneck causing supply constraints is likely to persist regardless of any negotiations. Don’t expect crude oil prices to plummet solely because of a ceasefire headline. That said, in the short-term data shown below, the sector most actively sold yesterday was energy, indicating the reaction was strong enough to temporarily trigger short-term models to go short energy. The question now is whether Friday’s price action will also produce an intermediate exit signal. I suspect that the longer-term trends will stay intact with a bit more stability, and a full breakdown through these levels is unlikely.
Tomorrow brings the PCE price report, and as I have been discussing, I don’t see any realistic chance that this release will show significant inflationary pressure at this time. Could there be a slight increase in the number? Sure. But I don’t believe it will be meaningful in the bigger picture, and it definitely won’t reflect the real-world impact of crude oil trading well above the 95 to 105 range I’ve been outlining for weeks. That impact takes time to show up in the data, and by the time it appears in PCE or CPI, the market will have already priced it in or moved past it. The caveat, of course, is that markets remain highly sensitive to anything touching the inflation story while crude sits at these levels, so even a benign number might trigger a short-lived reaction simply because of the backdrop.
The FOMC minutes were released and did exactly what I predicted when we reviewed the Fed meeting. They acknowledged the war, expressed appropriate concern, and did nothing because there is nothing they can do. A few central banks worldwide, none of them major, have raised rates in response to oil prices, but that won’t change anything from a structural perspective. You can’t fix a supply-side shock with higher interest rates. Interest rates don’t resolve everything, and this is a clear example of a disruption beyond the scope of monetary policy. The Fed understands this, the market understands it, and the minutes simply confirmed what was already clear.
As we approach the end of this week, I don’t expect any major developments from the remaining data releases. Initial claims and continuing claims might cause a minor reaction somewhere, but I doubt it will have much impact. As an American living in the U.S., I can say that, domestically, the war hasn’t significantly changed attitudes or economic behavior. People are just disappointed that gasoline prices have risen from three dollars to over four dollars, but there aren’t many additional stressors from the conflict right now. The country is energy independent, and that protection is doing exactly what it’s supposed to.
The opening of the Strait, if it eventually occurs, will ease significant pressure in Asia. There will likely be many tankers ready to head to Japan, the Philippines, and across that entire region to restore fuel supplies to a more stable level than they are now. Situations are becoming very critical in several locations across both Europe and Asia, and the longer the Strait stays closed, the more intense those pressures will become.
