subject: All About Rectangles [print this page] All About Rectangles All About Rectangles
My observation of a triangle is confirmed as you appraise the following: A rectangle is a progress to a relative new high, we then observe a pullback to an intermediate support level, the recent new high is retested then another pullback occurs back to the intermediate support level.
Why Does It Happen?
Upon initial observation, a rectangle pattern appears to be a similar formation to a double top pattern. These two patterns reveal some different characteristics, the double top is a reversal pattern and the rectangle is a continuation pattern. Rectangle patterns generally evolve after the stock has been in a decisive trend and has lasted for at least 4-6 weeks. The solid trend was formed on good fundamental and positive market sentiment. If you have a strong trend in this condition there comes a time where the market and investors need to end and absorb the influx of news and gather information to understand the solid go. The stock enters a holding pattern where we have almost equal support and resistance levels. Across this time we have provide and demand at most equal levels. Traders are still confident the stock is a solid performer they will not push the price higher. Quite time and again they sell off and take their profits and then buy back into the stock later the stock hits a resistance level. The pattern evolves when a sentimental stock rallies to a new high along with solid volume. The market obtains further information and it is spread wider to investors, the market is confident and accepts the information and appears to be willing to pay more for the stock. After a few weeks the traders decide the stock is overvalued and it forms a new high (Top 1). Generally, this first new high would see the opportunistic trader exit their trades. As these traders close their positions the stock falls therefore as with further instances some traders cannot accept a loss and the stock eventually stabilizes (reaction low). Then stock begins to move higher, generally the market will receive some positive fundamental information. With the stock advancing the volume slows and the traders who had entered anterior to the first high and didn't sell begin to close their positions on the perceived strength. As the stock is sold off on solid volume the stock falls to a second high (Top 2), as this high is created the market perception becomes more negative. While the continued flow of information is still positive the research analysts present the reports on the high stock valuation, the traders hold back.
At this detail in time the opportunists commence to enter short positions, they consider a larger fall in the share price is about to eventuate. The stock moves tight lower nevertheless the volume is stiff and progressively quicker. The stock falls to the reaction low for the second time and the market opinion is quite poor. The stock however holds at the resistance level and again moves higher on supporting volume. A restrained rally starts although the speculators keep accepting to remain bearish and supply to their short positions. Over the following days further positive announcements are realized and the stock again moves back to the highs at top 1 and top 2, the rise is backed by strong volume. The succeeding few sessions is fairly positive as market analysts provide bright and upbeat reports to the public. This causes the stock price to break through the resistance high. The traders, who had shorted the stock immediately, have to cover their positions, on the owners of the stock sensing a more rally higher the supply is very limited and this forces the stock price even higher. Over the coming weeks the stock prices move considerably higher and a new trend unfolds.
Technical Signals
1. Trend: an established tendency must be maintained in order to specify as a prolongation figure. As the ascending triangle behaves positively bullish, the strength of the formation is more important than the extent of the current trend.
2. Four (4) Points: to form the reaction high it is necessary to have at least two (2) equivalent tops to form the upper resistance level. In contrast it is also necessary to have at least two (2) equivalent lows to create the lower support level. While these levels are important they only have to be within a few points to confirm the highs and lows. It is also quite favorable to have the highs and lows to be alternating in form.
3. Volume: A rectangle is opposite to the symmetrical triangle pattern; also rectangle patterns generally do not display standard volume patterns. On occasion the volume will weaken as the pattern develops. At other times volume will alternate between the support and resistance levels. It is quite rare that the volume increases as the pattern unfolds. If the volume does reduce it is suitable to wait until an expansion of volume to confirm the breakout. As the volume alternates, it is desirable to look at movements of the share price, (rises to resistance and declines to support). You need to assess where the strength of the volume is. This would lead to what direction the stock price will go.
4. Duration: the rectangle pattern could evolve over a few weeks or to a number of months. If the design is less than three (3) weeks, it is normal to presume this short pattern to be a flag which is also a continuation pattern.
5. Breakout Direction: a breakout direction can only occur when a significant price moves through a support or resistance level. Both rectangle and symmetrical triangles are achromatic patterns that are relied upon for the succeeding instruction of the share rate and future rallies. Volume Patterns generally offer some technical analysis on the movement of the stock price but there is no true confirmation until the actual stock price breaks through a support level or falls through a support level.
6. Breakout confirmation: A breakout is validated by the closing price not an intra- day price.
7. Return to Breakout: the basic principle of technical analysis is when support is broken and then turns into possible resistance and visa versa. When the stock price breaks through the resistance level there is sometimes a retest back to test the new level of support.
8. Target: the promising breakout price target is estimated by measuring the height of the rectangle and adding or subtracting to the level.
