I had the exact same issue. I fixed it but then another problem occurred.
To fix, check

• You have the following in env.sh[.eex]. Note that using short names won’t work, or I couldn’t get it to work. Use long names.

export RELEASE_DISTRIBUTION=name
export RELEASE_NODE=<%= @release.name %>@127.0.0.1

• Restrict the port used by node to a specified one, e.g. adding -kernel inet_dist_listen_min 60606 inet_dist_listen_max 60606 to ELIXIR_ERL_OPTIONS in env.sh[.eex].

• Forward ports like ssh -L 4369:127.0.0.1:4369 -L 60606:127.0.0.1:60606 nodehost. Note you shouldn’t have epmd running in your system, and you have to use the remote one. To make sure you are not running epmd locally, run epmd -kill before opening ssh session.

• Start IEx shell like iex --hidden --cookie 'yourcookie' --name local@127.0.0.1

Now when I run Node.connect :"distname@127.0.0.1" I get true and nodes connect. But when I do :observer.start locally and select the remote node in Nodes menu, I get the following error:

16:22:06.248 [error] [node: :"distname@127.0.0.1", call: {:observer_backend, :sys_info, []}, reason: {:badrpc, {:EXIT, {:undef, [{:observer_backend, :sys_info, [], []}, {:rpc, :"-handle_call_call/6-fun-0-", 5, [file: 'rpc.erl', line: 197]}]}}}]

Then I found about :runtime_tools which contains :observer_backend. See Troubleshooting in Tracing and observing your remote node « Plataformatec Blog.

After this, it works like a charm!