Rectangles: Bull & Bear Signals
Rectangles are one of the most reliable chart patterns when they appear in close proximity to support or resistance during an up-trend. This also applies to other short-term patterns such as pennants.
- One of the best bull signals you will find is where a narrow rectangle forms immediately below major resistance. Buying support is strong enough to prevent a retracement and normally it is only a matter of time before a breakout.
- A rectangle that forms immediately after a breakout, above the former resistance level, is also bullish. Buyers and sellers are evenly matched, but support is likely to outlast resistance, resulting in an upward continuation. However, the pattern is more prone to failure: a close below the former resistance level is a bearish sign.
- A narrow rectangle that forms above support is a strong bear signal. Sellers are preventing a rally and support will most likely fail.
- A rectangle that forms immediately below a former support level is also bearish, but more prone to failure: close back above the former support level may be a bear trap.
Volume should decline during the consolidation and spike up at the breakout. Note, after the breakout, how volume also declines on retracement back to the new resistance level at $13.00 and spikes upward on the reversal.