Support/Resistance Overlap Strategy

Currently, we can identify many overlap situations happening right now in the markets. Before showing you new ones, let’s explain in detail the psychological process involved in such situations. In other words, why does a former support level becomes a new resistance mark (polarity principle) ? We will describe 3 steps to this very clear process:
Step 1: you’re a seller above 10 // you’re a buyer above 10
Step 2: the price breaks below 10 and so you earn money // the price breaks below 10 and so you lose money
Step 3: the price pulls back on 10 and you take this opportunity to consolidate your shortselling position around your average price, therefore contributing the price to turn down 10 again // the price throws back on 10 and you take this opportunity to clear your buying position with no loss, therefore contributing the price to reverse down on 10. 

Let’s now depict this psychological process on our 10-YR T-Note example.

ADAPTED OPTION STRATEGY: BEAR PUT SPREAD

As the downside is potentially limited by the next key support level (123 19/32), 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 124 3/4 and the sale of a put with a strike of 123 3/4 for a net debit.

BEAR PUT SPREAD: Leg 1

Trading Symbol OZN H7
Option Type PUT
Option Strategy BUY
Strike 124 3/4
Expiration Mar 2017

BEAR PUT SPREAD: Leg 2

Trading Symbol OZN H7
Option Type PUT
Option Strategy SELL
Strike 123 3/4
Expiration Mar 2017

ADAPTIVE FUTURES STRATEGY

Trading Symbol ZN H7
Strategy SHORT
Entry Point 124 27/32
Target 123 19/32
Stop Loss 125 3/32
Contract Expiry Mar 2017

THE SUPPORT/RESISTANCE OVERLAP STRATEGY: ZN H7 DECEMBER 5TH

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

Here the 124 27/32 mark is our overlap (Support on November 23rd & November 25th then resistance on December  5th).  The  target  of  this  overlap  strategy is 123 19/32, the previous significant bottom shaped on December 1st. Profit should be taken at or near 123 19/32. Indeed, prices may reverse up significantly as shortsellers will not only take profit but also as buyers may take advantage of this key & cheap support level.

POTENTIAL DOWNSIDE PER CONTRACT

If prices close above the 125 3/32 mark (next resistance and upper end of the bearish gap), the position should be closed with a limited loss in order to avoid a stronger technical recovery towards 125 13/16.

The Support/Resistance Overlap Strategy happening in the markets

Mexican Peso: 6M

British Pound: 6B


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