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.
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.
|Trading Symbol||OZN H7|
|Trading Symbol||OZN H7|
|Trading Symbol||ZN H7|
|Entry Point||124 27/32|
|Stop Loss||125 3/32|
|Contract Expiry||Mar 2017|
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.
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.
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