The Support/Resistance Overlap Strategy

As traders, our job is to spot low-risk opportunities (particularly at visual inflection points) and manage open positions in real-time as new information appears each day on the price chart. A common low-risk trading strategy is taking advantage of support level breakouts. When prices break below an established support level, this level usually becomes new resistance on a technical recovery (polarity principle). Shortselling on this new resistance level provides a low-risk entry with a stop-loss just above the resistance area in case the resistance fails and prices break up. We illustrate this overlap strategy below.

ADAPTED OPTION STRATEGY: BEAR PUT SPREAD

As the downside is potentially limited by the next key support level (2233.5), a bear spread allows you to lower the cost of the strategy (in comparison to a straight long put) by selling a put out of the money. As a result, the strategy consists of the simultaneous purchase of a put with a strike of 2250c and the sale of a put with a strike of 2235c for a net debit.

Bear Put Spread: Leg 1

Bear Put Spread: Leg 1  
Trading Symbol ES H7
Option Type PUT
Option Strategy BUY
Strike 225000
Expiration Mar-17

Bear Put Spread: Leg 2

Trading Symbol ES H7
Option Type PUT
Option Strategy SELL
Strike 223500
Expiration Mar-17

ADAPTIVE FUTURES STRATEGY

Trading Symbol ES H7
Strategy SHORT
Entry Point 2251.5
Target 2233.5
Stop Loss 2255
Contract Expiry Mar-17

THE SUPPORT/RESISTANCE OVERLAP STRATEGY: ES H7 DEC 30TH

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

Here the 2251.5 mark (neckline of a double-top pattern) is our overlap (Support on December 22nd then resistance on December 30th). The target of this overlap strategy is 2233.5, the flipflop between the December 20th/27th tops and December 22nd bottom reported from 2251.5 (dotted arrows). Profit should be taken at or near 2233.5. Indeed, prices may reverse up significantly as shortsellers will not only take profit but also as buyers may take advantage of this key support level.

POTENTIAL DOWNSIDE PER CONTRACT

If prices close above the 2255 mark (next resistance), positions should be closed with a limited loss in order to avoid a stronger technical recovery towards 2269.5.

The Support/Resistance Overlap Strategy happening in the markets

Eurodollar: GEZ7

5-Year T-Note: ZFH7


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