Inverted Head & Shoulders Bottom

The inverted head and shoulders pattern is a reversal pattern signaling a bottom as it occurs following a downtrend. Volume in the formation of the left shoulder is often higher than volume during the formation of the head, confirming that price is declining with less intensity, and perhaps soon will find support. As the right shoulder completes, volume often will increase with the resulting price advance back up toward the neckline. The buy signal is when price breaks above the neckline.

ADAPTED OPTION STRATEGY: CALL RATIO BACKSPREAD

The call ratio backspread is a bullish strategy that involves selling 1 Call option and buying 2 Call options of the same underlying instrument and expiration date at a higher strike price. It is an unlimited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will experience significant upside movement in the near term.

CALL RATIO BACKSPREAD: Leg 1  
Trading Symbol LO G7
Option Type 1 CALL
Option Strategy Sell
Strike 44
Expiration Feb 2017
CALL RATIO BACKSPREAD: Leg 2  
Trading Symbol LO G7
Option Type 2 CALLS
Option Strategy Buy
Strike 49
Expiration Feb 2017
ADAPTIVE FUTURES STRATEGY  
Trading Symbol CL F7
Strategy LONG
Entry Point 45.85
Target 49.2
Stop Loss 44.55
Contract Expiry Jan 2017

POTENTIAL GAIN PER CONTRACT

The theoretical target of this strategy is a measured move up equal to the distance between the pattern’s low (Head) and the neckline at indicated by the arrows on the chart for a total of appx. 3.35 points.

INVERTED HEAD AND SHOULDERS BOTTOM: CL F7 NOV 21ST

ACTUAL OUTCOME

POTENTIAL DOWNSIDE PER CONTRACT

If the price falls below the right shoulder where the stoploss is placed (44.55), the position is closed. The goal after entering the position is to adjust the stop-loss to the neckline of the pattern (45.85) as soon as the trade is working in your favor as the neckline usually acts as support once the pattern has been confirmed.

Inverted head and shoulders bottom in the markets now.

WTI Crude: CL

Gasoline: XRB


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