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Written by and copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved.
For more information on this pattern, read
Encyclopedia of Chart Patterns, Second Edition  ,
pictured on the right, pages 563 to 578. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.
Rectangle bottoms, so called because price enters the pattern from the top, are mid list
performing chart patterns. The failure rate is higher than other chart patterns, but the average rise in a bull market
is quite good. However, rectangle bottoms (or horizontal channels) are rare.
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Rectangle Bottom Chart Pattern
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Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 11 out of
23; 12 out of 21
Break even failure rate for up/down breakouts: 10%; 16%
Average rise/decline: 46%; 14%
Throwback/pullback rate: 53%; 69%
Percentage meeting price target for up/down breakouts: 85%; 50%
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Identification Guidelines
| Characteristic | Discussion |
| Price trend | Downward leading to the chart pattern. |
| Shape | Prices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trendlines. |
| Trendlines | Two near horizontal trendlines bound price action. |
| Touches | Price should touch each trendline at least twice using distinct peaks and valleys. |
| Volume trend | Trends downward at least 66% of the time. |
| Breakout | Downward 55% of the time. |
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Trading Tips
| Trading Tactic | Explanation |
| Measure rule | Compute the height between the two trendlines
(A and B in the measure
rule figure to the right) and then multiply it by the above “percentage meeting
price target.” Add it to the price of the top trendline
(A, upward breakouts) or subtract it from the bottom
trendline (B, downward breakouts) to get a target
price (C). |
| Wait for breakout | Since the breakout can be in any direction, wait for price to close outside the trendline before taking a position. |
| Intrapattern trade | If the rectangle is tall enough, buy at the bottom trendline and sell at the top one, then reverse the trade. |
| Height | Tall patterns with upward breakouts perform substantially better than short ones. |
| Volume trend | Rectangles with a rising volume trend outperform regardless of the breakout direction. |
| Volume shape | Rectangles with a random volume shape perform best regardless of the breakout direction. |
| Breakout volume | Heavy breakout volume pushes price further regardless of the breakout direction. |
| Yearly middle | Rectangles with upward breakouts in the middle of the yearly price range perform best. Downward breakouts do best near the yearly low. |
| Partial rise/decline | A partial rise predicts a downward breakout 83% of the time; a partial decline correctly predicts an upward breakout 81% of the time. |
| Throwbacks and pullbacks | Throwbacks and pullbacks
hurt post breakout performance. |
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 The Measure Rule
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Example
The above figure shows an example of a rectangle bottom chart pattern. Price bounces between two parallel trendlines.
Few chart patterns are perfect and the one shown has price peaking out the top at B. A
pullback at A allows traders that own the stock another opportunity to exit a position before the downtrend
resumes.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2009 by Thomas N. Bulkowski. All rights reserved. Disk full. Press F1 to belch.
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