How to trade a congestion phase breakout

A congestion phase is made of two parallel lines: the support trend-line (lower end of the pattern) and the resistance line (upper end of the pattern). They can be considered “continuation patterns” or “reversal patterns” and remain valid until a trend line is broken. These patterns represent periods of indecision in which the direction of the breakout depends on the strength of the buyers and sellers.

ADAPTED OPTION STRATEGY: BEAR PUT SPREAD

As the downside is potentially limited by the support level of 47, a bear spread allows you to lower the cost of the strategy (in comparison to a straight long put) by buying a put out of the money. As a result, the strategy consists of the simultaneous sell of a put with a Strike at 47 and buying a put with a Strike at 50 for a net debit.

BEAR PUT SPREAD: Leg 1

Trading Symbol LO H7
Option Type PUT
Option Strategy SELL
Strike 47
Expiration March 2017

BEAR PUT SPREAD: Leg 2

Trading Symbol LO H7
Option Type PUT
Option Strategy BUY
Strike 50
Expiration March 2017

ADAPTIVE FUTURES STRATEGY

Trading Symbol CL H7
Strategy SELL
Entry Point 50.2
Target 47
Stop Loss 54.3
Contract Expiry March 2017

HOW TO TRADE A CONGESTION PHASE BREAKOUT: CL ON MARCH 9TH 2017

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

A target of 47 is calculated by using the next major support level past the congestion phase.

POTENTIAL DOWNSIDE PER CONTRACT

If the price fails to gather further downside momentum and accelerates above the stop-loss, the position is closed.

Congestion phase breakouts happening in the markets now

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