As of 09/18/2020
Indus: 27,657 244.56 0.9%
Trans: 11,432 120.44 1.0%
Utils: 798 12.86 1.6%
Nasdaq: 10,793 117.00 1.1%
S&P 500: 3,319 37.54 1.1%

YTD
3.1%
+4.9%
9.2%
+20.3%
+2.7%

29,400 or 26,700 by 10/01/2020
11,750 or 10,600 by 10/01/2020
845 or 775 by 10/01/2020
11,800 or 10,400 by 10/01/2020
3,600 or 3,200 by 10/01/2020

As of 09/18/2020
Indus: 27,657 244.56 0.9%
Trans: 11,432 120.44 1.0%
Utils: 798 12.86 1.6%
Nasdaq: 10,793 117.00 1.1%
S&P 500: 3,319 37.54 1.1%

YTD
3.1%
+4.9%
9.2%
+20.3%
+2.7%
 
29,400 or 26,700 by 10/01/2020
11,750 or 10,600 by 10/01/2020
845 or 775 by 10/01/2020
11,800 or 10,400 by 10/01/2020
3,600 or 3,200 by 10/01/2020
 
Information on busted chart patterns is discussed in my book, Visual Guide to Chart Patterns. You can find information in the book in Chapter 22: "Busted Pattern Buy Setups" (starting on page 229) and in Chapter 25, "Busted Pattern Sell Signals" starting on page 271.
I show a picture of the book on the right.
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Price can breakout of a rectangle in any direction. When price moves less than 10%, reverses direction, and closes beyond the side opposite the breakout, it busts the chart pattern.
Busted rectangles with upward breakouts see price drop an average of 10%. Downward breakouts rise an average of 34%. That's for all types of busted rectangles (single, double, triple and more).
If you are lucky enough to ride a single busted rectangle, then the average drop is 18% (upward breakouts) and the average rise is 61% (yes, 61% for downward breakouts).
I show a chart of a single busted rectangle in Bemis (BMS) on the daily scale. The rectangle is highlighted by red trendlines and price crosses the chart pattern from side to side, filling the white space and touching each trendline at least twice.
Price breaks out of the rectangle at A and rises to B. That move is less than 10% before price crosses the rectangle and closes below the bottom of the rectangle at C. When that happens, it busts the rectangle. Price continues down at least 10% (not shown), completing the single busted rectangle.
For a single bust, look for:
For the last point, 4, if price fails to move more than 10%, then it could be forming a double busted rectangle.
The figure to the right shows an example of a double busted rectangle in Gilead Sciences (GILD) on the weekly scale.
The rectangle appears between the red lines in mid January and extending into February. Price pokes its head out the top of the rectangle at A and rises to B. That move is less than 10%.
Price then closes below the bottom of the rectangle at the candle shown at C. This busts the rectangle for the first time.
Price rebounds and moves up, closing above the top blue line, busting the rectangle for the second time at D. The stock could drop and cross the rectangle again, busting it for a third time, but so far, that hasn't happened.
For a double bust, look for these elements.
If price fails to move at least 10% in the new direction, then it could be a triple busted rectangle.
Loews (L) on the daily scale, pictured on the right, is an example of a triple busted rectangle.
The rectangle is outlined in red on the far left of the chart. Price closes below the bottom trendline at A, making a downward breakout. Price drifts down to B, but that move is less than 10% from the bottom of the rectangle. Then the stock rises to C, busting the rectangle for the first time. The rise above the top blue line (the top of the rectangle) is less than 10%.
Price moves down to D where it closes below the bottom blue line (below the bottom of the rectangle). This busts the rectangle for the second time.
The move from the blue line to the low after D is less than 10% before price reverses.
Price climbs to E where it closes above the top of the rectangle, busting it for the third time. At this point, for testing purposes, I stop counting. However, this stock busts the rectangle a fourth time and heads lower, completing the busting cycle at four when price moves more than 10% in the new direction.
Notice that the two green lines highlight a double busted rectangle. Price breaks out downward, rises to G where it busts the rectangle for the first time and then drops to H where it closes below the bottom of the rectangle. This busts it for the second time. Price then drops more than 10% below the bottom of the rectangle, completing the busted count process.
For a triple (or more) busted rectangle, look for the following:
I found 1,681 rectangles in 760 stocks dating back as far as July 1991 to October 2011. Few stocks covered the entire period. All of the rectangles I found manually either using a historical search or real time (looking at my stocks each day). The real time additions prevented any lookahead bias since I am not privy to future price movements.
I then used software to measure performance and flag busted chart patterns.
Gauging performance uses the same method as I used to catalog nonbusted chart patterns. That is, the search for the new ultimate high or low proceeded as described in the glossary. Thus, the numbers reported in Busted Rectangles Results (next section) should be considered perfect trades. Do not expect to duplicate the results in actual trading. The numbers should be used only for comparison purposes to other chart patterns.
The following numbers are the results from perfect trades in bull markets, unless otherwise noted. Do not expect actual trading results to match those discussed below. Use the numbers only for comparison purposes with other chart patterns.
How often do rectangles bust?
Upward Breakouts
Downward Breakouts
Of busted rectangles, what is the frequency distribution?
Upward Breakouts
For upward breakouts, 43% of them will bust just once, meaning that 57% will fail to drop more than 10% below the bottom of the rectangle.
Downward Breakouts
If you trade busted rectangles with downward breakouts, there is a 66% probability that it will bust just once. Thus, 34% fail to show price rising by more than 10% above the top of the rectangle.
What is the average move for single busted rectangles? As measured from the bottom (the lowest valley) or the top (the highest peak) of the chart pattern to the ultimate low or high, respectively, the move averaged:
Upward Breakouts
Downward Breakouts
What is the move for perfect trades after all busted rectangles?
What is the failure rate of all busted rectangles in bull markets? The answer appears in the below table.
Failure rate:  5%  10%  15%  20%  25%  30%  35%  50%  75%  >75% 

Number of rectangles:  66  44  17  15  8  11  10  4  1  0 
Percentage:  38%  25%  10%  9%  5%  6%  6%  2%  1%  0% 
Cumulative:  38%  63%  72%  81%  85%  91%  97%  99%  100%  100% 
For example, there were 66 rectangles with upward breakouts that failed to show price dropping at least 5% below the bottom of the rectangle. Those represent 38% of all bull market, busted rectangles. On a cumulative basis (a running total), they also represent 38% of all busted rectangles with upward breakouts.
The median drop of all busted rectangles is 7%. You can see that by interpolating between the 5% and 10% columns. Thus, half of all busted rectangles will see price drop 7% in a bull market, providing they are traded perfectly.
Failure rate:  5%  10%  15%  20%  25%  30%  35%  50%  75%  >75% 

Number of rectangles:  40  24  20  19  11  10  4  16  18  22 
Percentage:  22%  13%  11%  10%  6%  5%  2%  9%  10%  12% 
Cumulative:  22%  35%  46%  56%  62%  67%  70%  78%  88%  100% 
Read the table just as you did the prior one. Let's begin with the 10% column. Twentyfour rectangles saw gains from over 5% to less than or equal to 10%. They represented 13% of busted rectangles. On a cumulative basis, 35% of rectangles saw price climb up to 10% after busting a downward breakout (as measured from the top of the pattern to the ultimate high).
How could you trade a busted rectangle? The figure on the right gives an example.
A small rectangle appears in June 2011 in Zebra Technologies (ZBRA). Price breaks out upward from this pattern. Price does not rise by much (less than 10%) before reversing.
Price busts the rectangle at A when it closes below the bottom of the rectangle. Price continues dropping to B, bounces, and completes its drop to C (so far).
If you placed an order to short the stock a penny below the bottom of the rectangle, that would have gotten you into the stock at 39.67.
Once the down trend got going and you recognized a straightline run down, then placing a stop a penny above the prior candle would work well. That would take you out of the trade when price moved above the top of candle B. The low at B is 30.03 and the exit price is 32.38.
Thus this trade could have made 18% (39.67 to 32.38).
All of these tips apply to bull markets only!
For a definition of the trend start, visit the glossary.
For downward breakouts, when the time between the trend start and the start of the rectangle is less than or equal to the median 69 days, the stock rises an average of 48% (90 samples). When the time is more than the median, the rise averages 29% (87 samples). Thus, for busted rectangles with downward breakouts (price rises after busting), look for a trend start less than 69 days before the start of the rectangle.
For upward breakouts, the numbers flip: 9% average gain (88 samples) versus 11% (85 samples) for times of less than or equal to 76 days (the median for upward breakouts) versus longer periods, respectively. The best performance comes when the trend start is more than 76 days before the start of the rectangle.
When the trend start price is above the top of the busted rectangle by less than or equal to the median 9% and the rectangle breaks out downward, the busted pattern sees the stock rise by 55% (44 samples). If the trend start is above the busted rectangle by more than 9%, the rise averages 31% (44 samples). These measures exclude trend starts below the top of the rectangle. Look for the top of a busted rectangle with a downward breakout to be within 9% of the trend start.
The performance difference for upward breakouts is 8% (less than or equal to the median) to 12% (more than the median) for a median measure of 11% above the top of the rectangle. For the best performance, look for a trend start more than 11% above the top of the rectangle.
Comparing the trend start to above or below the top of the rectangle (a different measure than the previous), we find the following.
If the high price at the trend start is below the top of the rectangle and price breaks out downward, then busted patterns see price climb an average of 29% (89 samples). When the trend start is above the rectangle, the rise averages 48% (88 samples). Look for the trend start to be above the start of the rectangle after a downward breakout.
Upward breakouts show no performance difference.
As an entry setup, here are the rules for trading busted rectangles.
For upward breakouts...
For downward breakouts...
 Thomas Bulkowski
See Also

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