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: SHORT SYNTHETIC FUTURES

As the upside potential may be limited by the 2490 (a 100% 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 2440 and selling a call with a strike at 2490.

BULL CALL SPREAD: Leg 1

Trading Symbol ES U7
Option Type CALL
Option Strategy LONG
Strike 2440.00
Expiration SEP 17

BULL CALL SPREAD: Leg 2

Trading Symbol ES U7
Option Type CALL
Option Strategy SHORT
Strike 2490.00
Expiration SEP 17

ADAPTIVE FUTURES STRATEGY

Trading Symbol ES U7
Strategy LONG
Entry Point 2413.50
Target 2490.00
Stop Loss 2345.00
Contract Expiry SEP 17

CONSOLIDATION PATTERN: ES U7 MAY 17

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

A target of 2490 is calculated from the previous bottom at 2320 by the 100% measured move, which is showed as an arrow in the chart.

POTENTIAL DOWNSIDE PER CONTRACT

If the price closed below the previous bottom at 2345, the position should be closed with limited loss.

Consolidation Pattern Happening Now

Nasdaq:NQ

5-Year Treasury Notes: ZF


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