Rectangle Pattern

Rectangles are one of the most reliable chart patterns when they appear in close proximity to support or resistance during an uptrend. Narrow rectangles are formed by support and resistance close together. This also applies to other short-term patterns such as pennants.

Rectangles signal accumulation when they occur in an up-trend and distribution in a down-trend and are traded in a similar fashion to flags and pennants.

Rectangle Pattern: Bull and Bear Signals

In an Up-trend

• 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.

In a Down-Trend

• 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 Confirmation