As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
|
 46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 |
As of 11/20/2024
Indus: 43,408 +139.53 +0.3%
Trans: 17,002 -26.31 -0.2%
Utils: 1,055 +1.25 +0.1%
Nasdaq: 18,966 -21.33 -0.1%
S&P 500: 5,917 +0.13 +0.0%
|
YTD
+15.2%
+6.9%
+19.7%
+26.3%
+24.1%
| |
|
46,000 or 43,000 by 12/01/202418,000 or 16,600 by 12/01/20241,075 or 1,000 by 12/01/202420,000 or 18,400 by 12/01/20246,100 or 5,800 by 12/01/2024 | ||
Trading lessons added 6/13/24.
For more information on this pattern, read Encyclopedia of Chart Patterns, 3rd Edition. If you click on the link and then buy the book (or anything) during the visit at Amazon.com, the referral will help support this site. Thanks.
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Rectangle tops (or horizontal channels), so called because price enters the pattern from the bottom (creating a top). Upward breakouts are exceptional performers, but downward breakouts perform terribly.
The above numbers are based on more than 1,000 perfect trades. See the glossary for definitions.
| Characteristic | Discussion |
| Price trend | Upward 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 one trendline at least three times and twice on the other trendline, using distinct peaks and valleys, but be flexible. |
| Volume trend | Trends downward 70% of the time. |
| Breakout | Upward 63% of the time. |
| Trading Tactic | Explanation | 
The Measure Rule
|
| 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 (B, upward breakouts) or subtract it from the bottom trendline (A, 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 perform better than short ones. | |
| Yearly low | Rectangles, regardless of the breakout direction, perform best when the breakout is within a third of the yearly low. | |
| Partial rise/decline | A partial rise predicts a downward breakout 75% of the time; a partial decline correctly predicts an upward breakout 79% of the time. | |
| Throwbacks | Throwbacks hurt post breakout performance. |
The above figure shows an example of a long rectangle top chart pattern. Price bounces between two parallel trendlines for what seems like forever, but it creates a strong move upward when price finally pierces the top trendline.
I present the information in slider format, so be sure to click the left or right arrows to view another slide.
This downward breakout from a rectangle top met a swift decline as the green line shows. Notice that the stock found footing (B) at the launch price (A). That behavior is common.
The right portion of the chart shows AFG and a swift decline after a downward breakout. A rectangle top in AMTD on 1/17/2019 to 3/19/2019 shows a similar strong move down. Ditto for AON on 9/5/2014 to 10/6/2014.
The stock breaks out with a tall gap at A (and a tall price bar). The stock coasts higher for a few days and then declines, busting the upward breakout. When you see such bullish enthusiasm (a tall candle or a tall gap), then recognize that traders will sell the stock to capture their profit. That selling will send the stock lower (B). The reason for the bullish move (the gap up) is important, though. If it's earnings related, then the stock may retrace but will often resume the uptrend. If you can't find the reason for the strong push higher, then beware.
This is another example of a tall-price bar breakout. The tall bar is at A. The blue dot signals that you enter the trade at the open the next day and hope price rises far enough to reach the measure rule target (the height of the rectangle added to the price of the top of the rectangle). In this case, price reaches the target (red dot) and the green dot (B) is the ultimate high, which is the best you could have made if you traded the stock perfectly.
Then look what happens. The stock tumbles from B, down, and busts the upward breakout. A serious retrace from the breakout is delayed until after B, but it still happens. Search for other tall price bars and see how the stock reacts before trading a rectangle with a tall-bar or gap breakout.
When the breakout doesn't happen immediately, then proceed cautiously. This is an example where price is at the top of the rectangle. One can expect an upward breakout. Instead, the stock drops but not far enough to trigger a downward breakout. The trend reverses and it takes a few weeks before price closes above the top of the rectangle. When that happens, the stock breaks out upward and then the trade fails.
The same situation happens in EMN, with a rectangle from 2/24/2014 to 4/23/2014. Price takes its time breaking out upward (about a month). The stock does breakout upward and reverses, causing a long trade to fail.
-- Thomas Bulkowski
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