Rectangle Pattern
A
rectangle pattern or box pattern is a trading range which forms as a
consolidation phase following a trend, making it a continuation pattern in most
cases. The parallel trend lines connecting multiple highs and lows during
this extended period give the pattern its rectangle shape. A breakout
occurs when either
trend line is penetrated and the trading range is broken.
An upside breakout from a rectangle pattern following an uptrend is a
continuation signal for higher prices and is a technical buy signal. A
downside breakout from a rectangle pattern following a downtrend is a
continuation signal for lower prices and is a technical sell signal.
Context: Rectangle patterns as continuation patterns require a trend
which is followed by narrow price action within a trading range. The
trading range is defined by two parallel trend lines which are horizontal and
indicate the presence of
support and resistance.
Appearance: This is a
channeling stock with no tilt. The
stock's price action is contained by two parallel trend lines. Price is
prevented from achieving new relative highs due to the presence of sellers at
higher prices, while also being prevented from making new relative lows due to
the presence of buyers at lower prices. This forms a narrow trading range
for at least a few weeks, during which time the stock is only able to move
horizontally. A price penetration of either trend line, ideally on
expanding volume, is required to complete this pattern.
Breakout Expectation: A rectangle pattern breakout can be expected to
achieve the equivalent of the height of the rectangle added to the breakout
level.
This stock formed a rectangle pattern in
the midst of its uptrend, indicating that upside continuation was likely.
Soon after, this stock advanced an equal distance to the height of the rectangle
from the breakout point.
Be sure to learn about other
channeling stock patterns such as the
ascending channel and the
descending channel pattern.
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