As of 10/25/2021
  Indus: 35,741 +64.13 +0.2%  
  Trans: 15,874 +102.32 +0.6%  
  Utils: 918 -3.65 -0.4%  
  Nasdaq: 15,227 +136.51 +0.9%  
  S&P 500: 4,566 +21.58 +0.5%  
YTD
 +16.8%  
 +26.9%  
 +6.1%  
 +18.1%  
 +21.6%  
  Targets    Overview: 10/14/2021  
  Up arrow36,000 or 34,600 by 11/01/2021
  Up arrow16,100 or 14,500 by 11/01/2021
  Up arrow925 or 860 by 11/01/2021
  Up arrow15,400 or 14,200 by 11/01/2021
  Up arrow4,600 or 4,250 by 11/01/2021
CPI (updated daily): Arrows on 10/8/21
As of 10/25/2021
  Indus: 35,741 +64.13 +0.2%  
  Trans: 15,874 +102.32 +0.6%  
  Utils: 918 -3.65 -0.4%  
  Nasdaq: 15,227 +136.51 +0.9%  
  S&P 500: 4,566 +21.58 +0.5%  
YTD
 +16.8%  
 +26.9%  
 +6.1%  
 +18.1%  
 +21.6%  
  Targets    Overview: 10/14/2021  
  Up arrow36,000 or 34,600 by 11/01/2021
  Up arrow16,100 or 14,500 by 11/01/2021
  Up arrow925 or 860 by 11/01/2021
  Up arrow15,400 or 14,200 by 11/01/2021
  Up arrow4,600 or 4,250 by 11/01/2021
CPI (updated daily): Arrows on 10/8/21

Bulkowski on Busted Rectangles

 

Updated with new statistics on 12/29/2020.

The third edition of this book Encyclopedia of Chart PatternsEncyclopedia of Chart Patterns. has a table in most chapters discussing busted pattern performance.

$ $ $

Busted Rectangle: Summary

Price can breakout of a rectangle in any direction. When price moves no more than 10%, reverses direction, and closes beyond the side opposite the breakout, it busts the chart pattern.

For the statistics, I'll share with you numbers from rectangle tops because they have more busts than rectangle bottoms.

Busted rectangle tops with upward breakouts see price drop an average of 11%. Downward breakouts rise an average of 49%. 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 22% (upward breakouts which bust downward) and the average rise is 71% (yes, 71% for downward breakouts which bust upward).

Busted Rectangles: Single Busted

Picture of Bemis (BMS) on the daily scale.

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 no more 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 more than 10% (not shown), completing the single busted rectangle.

For a single bust, look for:

  1. Price breaks out either upward or downward from an rectangle by closing outside of the trendline border. This occurs at A in the figure.
  2. Price must move no more than 10% before reversing (the rise from the top red line to B).
  3. For upward breakouts, price then closes below the bottom of the rectangle (C). For downward breakouts, price closes above the top of the rectangle.
  4. Price continues moving in the new direction by more than 10% (the move below C).

For the last point, 4, if price fails to move more than 10%, then it could be forming a double busted rectangle.

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Busted Rectangles: Double Busted

Picture of Gilead Sciences (GILD) on the weekly scale.

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 no more 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.

  1. Price busts a rectangle for the first time (point C in this figure).
  2. Price must move no more than 10% before reversing (the drop from the bottom blue line to the low at candle C).
  3. Price reverses direction again, closing either above the top or below the bottom of the rectangle (The move from C to a close above the top trendline, at D).
  4. Price moves more than 10% in the new direction.

If price fails to move more than 10% in the new direction, then it could be a triple busted rectangle.

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Busted Rectangle: Triple Busted

Picture of Loews (L) on the daily scale.

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 no more 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 no more 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 no more 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:

  1. Find a double busted rectangle except that price fails to move more than 10% after the second bust (the up and down moves to D in this example).
  2. Price reverses direction again and closes below the bottom or above the top of the chart pattern, busting it for a third time (E).
  3. If price fails to move by more than 10% before reversing and closing on the opposite side of the rectangle, additional up and down busted cycles may continue.

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Busted Rectangles: Performance

Here's a few statistics from the book. This is for rectangle tops with downward breakouts (so they bust upward) in bull markets.

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Busted Rectangles: Trading

Picture of Zebra Technologies (ZBRA) on the daily scale.

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 (no more 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 straight-line 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).

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-- Thomas Bulkowski

See Also

 

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