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 1295 (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 1275 and selling a call with a strike at 1295.

CONSOLIDATION PATTERN: GC V7 ON AUG 2017

BULL CALL SPREAD: Leg 1

Trading Symbol OG V7
Option Type CALL
Option Strategy LONG
Strike 1275.00

BULL CALL SPREAD: Leg 2

Trading Symbol OG V7
Option Type CALL
Option Strategy SHORT
Strike 1295.00
Trading Symbol SI Z7
Strategy SHORT
Entry Point 17.860
Target 18.030
Stop Loss 17.510
Contract Expiry Dec 2017

ACTUAL OUTCOME

Trading Symbol GC V7
Strategy LONG
Entry Point 1270.60
Target 1295.00
Stop Loss 1257.00
Contract Expiry OCT 2017

POTENTIAL GAIN PER CONTRACT

A target of 1295 is calculated from the previous bottom at 1257 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 1257, the position should be closed with limited loss.

Consolidation Pattern

Euro: 6E

Crude Oil: CL


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