A rectangle pattern or box pattern is a trading range which forms as a consolidation phase following a trend, making it a continuation pattern in most cases. The parallel trend lines connecting multiple highs and lows during this extended period give the pattern its rectangle shape. A breakout occurs when either trend line is penetrated and the trading range is broken. An upside breakout from a rectangle pattern following an uptrend is a continuation signal for higher prices and is a technical buy signal. A downside breakout from a rectangle pattern following a downtrend is a continuation signal for lower prices and is a technical sell signal.
Context: Rectangle patterns as continuation patterns require a trend which is followed by narrow price action within a trading range. The trading range is defined by two parallel trend lines which are horizontal and indicate the presence of support and resistance.
Appearance: This is a channeling stock with no tilt. The stock’s price action is contained by two parallel trend lines. Price is prevented from achieving new relative highs due to the presence of sellers at higher prices, while also being prevented from making new relative lows due to the presence of buyers at lower prices. This forms a narrow trading range for at least a few weeks, during which time the stock is only able to move horizontally. A price penetration of either trend line, ideally on expanding volume, is required to complete this pattern.
Breakout Expectation: A rectangle pattern breakout can be expected to achieve the equivalent of the height of the rectangle added to the breakout level.
This stock formed a rectangle pattern in the midst of its uptrend, indicating that upside continuation was likely. Soon after, this stock advanced an equal distance to the height of the rectangle from the breakout point.
Rectangle patterns offer well-defined entries, so we highlight them regularly for members of our stock pick service. Come trade with us!