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Written by and copyright © 2005-2010 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 579 to 594. 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 tops (or horizontal channels), so called because price enters the pattern from the bottom (creating a top),
are mid list
performing chart patterns. The break even failure rate is higher than other chart patterns, but the average rise in a
bull market is quite good. Downward breakouts have a good performance rank because the change after the trend is a very
high 57%.
Rectangle Top Chart Pattern
Important Bull Market Results
Overall performance rank for up/down breakouts (1 is best): 12 out of
23; 6 out of 21
Break even failure rate for up/down breakouts: 9%; 11%
Average rise/decline: 39%; 17%
Throwback/pullback rate: 64%; 58%
Percentage meeting price target for up/down breakouts: 80%; 63%
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Identification Guidelines
| 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 each trendline at least twice using distinct peaks and valleys. |
| Volume trend | Trends downward at least 70% of the time. |
| Breakout | Upward 68% 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
(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. |
| Volume shape | Rectangles with a random volume shape and upward breakout perform best. |
| Yearly low | Rectangles with upward breakouts
within a third of the yearly low perform best but samples are few. Downward breakouts do best near the yearly low. |
| Partial rise/decline | A partial rise predicts a downward
breakout 61% of the time; a partial decline correctly predicts an upward breakout 89% 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 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.
Other Examples
-- Thomas Bulkowski
Copyright © 2005-2010 by Thomas N. Bulkowski. All rights reserved. If debugging is the process of removing bugs, then programming is the process of putting them in.
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