Getting Technical with Futures & Options: Consolidation Pattern

A consolidation pattern (pennant, flag, rectangle,…) is a very useful tool used to find good entry areas in the market. From a psychological point of view, these tools point to an ongoing debate between bulls and bears that will most likely be won by the bullish or bearish consensus that preceded the pattern. More concretely, a bullish/bearish consolidation pattern emphasizes that buyers/sellers are taking advantage of any dips/recoveries to consolidate their initial positions. Also, the opposite camp is realizing he’s wrong and tries to sell their open trades. Once the pattern is confirmed, the wait-and-see traders jump in on the move. To conclude, when a bullish/bearish consolidation pattern is validated, three categories of investors will join their efforts to buy/sell the market, making it stronger.

CONSOLIDATION PATTERN: ZC H7 NOV 18TH

ADAPTED OPTION STRATEGY: BULL CALL SPREAD

As the upside potential is limited by the 355.75 measured move target, a Bull Call spread allows you to lower the cost of the strategy (in comparison to a straight long call) by selling a call out of the money. As a result, the strategy consists of the simultaneous purchase of a call with a strike at 350 and selling a call with a strike at 360.

BULL CALL SPREAD: Leg 1
Trading Symbol ZC H7
Option Type CALL
Option Strategy BUY
Strike 350
Expiration Jan 2017
BULL CALL SPREAD: Leg 2
Trading Symbol ZC H7
Option Type CALL
Option Strategy SELL
Strike 360
Expiration Jan 2017

ADAPTIVE FUTURES STRATEGY

Trading Symbol ZC H7
Strategy LONG
Entry Point 350.5
Target 355.75
Stop Loss 348.25
Contract Expiry Jan 2017

POTENTIAL GAIN PER CONTRACT

A target of 355.75 is calculated by anticipating a measured move up between the flag’s top (351) and the previous move’s bottom (345.75), then projecting this height to the upside from where corn prices broke out (dotted arrows).

POTENTIAL DOWNSIDE PER CONTRACT

If the price closes under the pattern’s bottom at 348.25 points, the position will be closed with a limited loss as Corn could quickly fill the November 16th bullish gap.

ACTUAL OUTCOME

Consolidation patterns happening now in the markets.

Palladium: PA

Russian Ruble: 6

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