As of 07/11/2024
  Indus: 39,754 +32.39 +0.1%  
  Trans: 15,430 +330.93 +2.2%  
  Utils: 939 +20.22 +2.2%  
  Nasdaq: 18,283 -364.04 -2.0%  
  S&P 500: 5,585 -49.37 -0.9%  
YTD
 +5.5%  
-2.9%  
 +6.5%  
 +21.8%  
 +17.1%  
  Targets    Overview: 06/28/2024  
  Up arrow40,000 or 38,000 by 07/15/2024
  Up arrow15,950 or 14,750 by 07/15/2024
  Up arrow960 or 890 by 07/15/2024
  Up arrow19,200 or 17,800 by 08/01/2024
  Up arrow5,750 or 5,500 by 08/01/2024
As of 07/11/2024
  Indus: 39,754 +32.39 +0.1%  
  Trans: 15,430 +330.93 +2.2%  
  Utils: 939 +20.22 +2.2%  
  Nasdaq: 18,283 -364.04 -2.0%  
  S&P 500: 5,585 -49.37 -0.9%  
YTD
 +5.5%  
-2.9%  
 +6.5%  
 +21.8%  
 +17.1%  
  Targets    Overview: 06/28/2024  
  Up arrow40,000 or 38,000 by 07/15/2024
  Up arrow15,950 or 14,750 by 07/15/2024
  Up arrow960 or 890 by 07/15/2024
  Up arrow19,200 or 17,800 by 08/01/2024
  Up arrow5,750 or 5,500 by 08/01/2024

Bulkowski on Rectangle Bottoms

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.

-- Tom Bulkowski

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Rectangle bottoms, so called because price enters the pattern from the top, are good performing chart patterns. The performance rank is near the top of the list.

 

 

Score your pattern
for performance
Rectangle bottom chart pattern
Rectangle Bottom Chart Pattern

Rectangle Bottoms: Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 8 out of 39/14 out of 36
Break even failure rate for up/down breakouts: 15%/24%
Average rise/decline: 48%/16%
Throwback/pullback rate: 64%/66%
Percentage meeting price target for up/down breakouts: 79%/55%

The above numbers are based on more than 900 of perfect trades. See the glossary for definitions.

Rectangle Bottom: Identification Guidelines

CharacteristicDiscussion
Price trendDownward leading to the chart pattern.
ShapePrices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trendlines.
TrendlinesTwo near horizontal trendlines bound price action.
TouchesPrice should touch one trendline at least three time and the other trendline twice (5-touch minimum) using distinct peaks and valleys.
Volume trendTrends downward at least 71% of the time.
BreakoutUpward 59% of the time.

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Rectangle Bottom: Trading Tips

Trading TacticExplanation Rectangle bottom measure rule
The Measure Rule
Measure ruleCompute 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 breakoutSince the breakout can be in any direction, wait for price to close outside the trendline before taking a position.
Intrapattern tradeIf the rectangle is tall enough, buy at the bottom trendline and sell at the top one, then reverse the trade.
HeightTall patterns with upward breakouts perform substantially better than short ones.
Volume trendRectangles with a rising volume trend outperform regardless of the breakout direction.
Yearly lowRectangles with breakouts (up or down) near the yearly low perform best.
Partial rise/declineA partial rise predicts a downward breakout 75% of the time; a partial decline correctly predicts an upward breakout 77% of the time.
Throwbacks and pullbacksThrowbacks and pullbacks hurt post breakout performance.

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Rectangle Bottom: Example

Rectangle bottom chart pattern 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.

Rectangle Bottoms: Trading Lessons

I present the information in slider format, so be sure to click the left or right arrows to view another slide.

Lessons Summary

 

1 / 3
Chart of ACIW

Here I show a rectangle bottom with a downward breakout, as marked on the chart. The stock doesn't drop far before reversing and closing above the top of the rectangle. Price continues higher, reaching the ultimate high at almost 36 (not shown).

Next chart please.
2 / 3
Chart of ED

This was an easy trade to avoid. I drew two down-sloping trendlines, A and B, and expected the stock to reach that resistance and turn down. That's what happened with line A, at C. In other words, look for resistance setup by trendlines and avoid the trade because it could limit profit.

Next chart please.
3 / 3
Chart of EE

Here's an example of where Elliott wave counting came in handy. I didn't count the various up and down segments of the jagged red line (before trading, that is). I just assumed that the motive wave was over and I expected an ABC correction (green line) to send the stock higher. And that's what happened.

The end.

-- Thomas Bulkowski

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See Also

 

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