ESA: Volatility Coil & Puppets
Markets are dynamic and I like to revisit my assumptions to search for the null hypothesis. The last time I posted on the ESA, I was looking for a CD leg up for a potential upside to c.2800. While the call has partially worked, I think it is time to update and revisit. The recent price action in the ESA suggests a volatility coil is building up; it is best described as a wedge formation which has 50:50 odds of an upside/downside break. When it does break, it will spring forth like a coiled spring. Hence, its name "Volatility Coil". So 2 scenarios at play here:
1) ESA breaks upward to form a CD leg (xABCD pattern) off the back of strong corporate earnings for a upside potential of 2800. To me, the forward guidance would be more interesting considering the tax bill is stuck in legislative limo, there is the threat of trade war, a threat by the Donald to rescind the spending bill he just approved, but the market likes to extrapolate history and 1Q earnings should give the bulls some juice to push the market higher.
2) ESA breaks down to form a continuation CD leg (ABCD pattern) for a downside potential of c.2400 on what I am calling the "Puppet goes nuts" theory. Maybe the Russian collusion is more of an operation to influence the Donald via the use of influencers? With the Donald increasingly besieged and the influencers constrained, he might be compelled out to lash out at the perceived puppet master to reinforce the perception of innocence. Hence the move to strike Syria and risk an escalation with Russia in addition to piling on Russian sanctions. In this event, the Donald becomes more unpredictable, unstable and crosses a Russian red line. Or 1Q earnings could just suck. The point is, markets have not discounted the threat of geopolitical risks for too long; With the Donald increasingly behaving like a Disney duck and likely a lame duck by 2019 if the Dems wins the house, the higher the likelihood of an unforced policy error.
My inclination would be to derisk and use the heightened vols to build optionality in both directions.
1) ESA breaks upward to form a CD leg (xABCD pattern) off the back of strong corporate earnings for a upside potential of 2800. To me, the forward guidance would be more interesting considering the tax bill is stuck in legislative limo, there is the threat of trade war, a threat by the Donald to rescind the spending bill he just approved, but the market likes to extrapolate history and 1Q earnings should give the bulls some juice to push the market higher.
2) ESA breaks down to form a continuation CD leg (ABCD pattern) for a downside potential of c.2400 on what I am calling the "Puppet goes nuts" theory. Maybe the Russian collusion is more of an operation to influence the Donald via the use of influencers? With the Donald increasingly besieged and the influencers constrained, he might be compelled out to lash out at the perceived puppet master to reinforce the perception of innocence. Hence the move to strike Syria and risk an escalation with Russia in addition to piling on Russian sanctions. In this event, the Donald becomes more unpredictable, unstable and crosses a Russian red line. Or 1Q earnings could just suck. The point is, markets have not discounted the threat of geopolitical risks for too long; With the Donald increasingly behaving like a Disney duck and likely a lame duck by 2019 if the Dems wins the house, the higher the likelihood of an unforced policy error.
My inclination would be to derisk and use the heightened vols to build optionality in both directions.
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