Consolidation Pattern

A consolidation pattern (pennant, flag, rectangle,…) is a very useful tool used to find good entry areas in the market. From a psychological point of view, these tools point to an ongoing debate between bulls and bears that will most likely be won by the bullish or bearish consensus that preceded the pattern. More concretely, a bullish/bearish consolidation pattern emphasizes that buyers/sellers are taking advantage of any dips/recoveries to consolidate their initial positions. Also, the opposite camp is realizing he’s wrong and tries to sell their open trades. Once the pattern is confirmed, the wait-and-see traders jump in on the move. To conclude, when a bullish/bearish consolidation pattern is validated, three categories of investors will join their efforts to buy/sell the market, making it stronger.

ADAPTED OPTION STRATEGY: BULL CALL SPREAD

As the upside potential may be limited by the 2350 (a 50% of measured move), a Bull Call spread allows you to lower the cost of the strategy (in comparison to a straight long call) by selling a call out of the money. As a result, the strategy consists of the simultaneous purchase of a call with a strike at 2320 and selling a call with a strike at 2350.

BULL CALL SPREAD: Leg 1

Trading Symbol ES H7
Option Type CALL
Option Strategy LONG
Strike 2320
Expiration MAR 2017

BULL CALL SPREAD: Leg 2

Trading Symbol ES H7
Option Type CALL
Option Strategy SHORT
Strike 2350
Expiration MAR 2017

ADAPTIVE FUTURES STRATEGY

Trading Symbol ES H7
Strategy LONG
Entry Point 2277.25
Target 2350.00
Stop Loss 2227.00
Contract Expiry MAR 2017

CONSOLIDATION PATTERN: ES H7 DEC 2016

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

A target of 2350 is calcuated from the previous bottom at 2227 by the 50% measured move, which is showed as an arrow in the chart.

POTENTIAL DOWNSIDE PER CONTRACT

If the price closed below the previous bottom at 2227, the position should be closed with limited loss.

Using moving average support levels happening now

AUD: 6A

Palladium:PA


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