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: BEARISH PUT SPREAD

As the downside is potentially limited by the next significant support level at 17.25 (the low of August 29) , 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 17.75 and the sale of a put with a strike of 17.25 for a net debit.

BEARISH PUT SPREAD: Leg 1

Trading Symbol SO Z7
Option Type PUT
Option Strategy LONG
Strike 17.75
Expiration DEC 17

BEARISH PUT SPREAD: Leg 2

Trading Symbol SO Z7
Option Type PUT
Option Strategy SHORT
Strike 17.25
Expiration DEC 17

ADAPTIVE FUTURES STRATEGY

Trading Symbol SI Z7
Strategy SHORT
Entry Point 17.77
Target 17.25
Stop Loss 18.03
Contract Expiry DEC 17

CONSOLIDATION PATTERN: SI Z7 SEP 17

ACTUAL OUTCOME

POTENTIAL GAIN PER CONTRACT

The target is set at 17.25 (the low August 29).

POTENTIAL DOWNSIDE PER CONTRACT

If prices broke above 18.03, the position should be closed with limited loss.

Consolidation Pattern Happening Now

6B: British Pound

Gold: GC


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