Rectangle Pattern

Chart Patterns

Reversal Pattern

Continuation Pattern

A rectangle is a pattern which forms on a chart where the price of a security is trading within a bounded range in which the levels of resistance and support are parallel to each other thus resembling the shape of a rectangle.

This signals that the price movement, which gets blocked during the pattern, will trend in the direction of the price breakout from the bounded range. The bounded range, or rectangle, is a period of consolidation in which market participants are generally suspensive.

The formation of this pattern typically sees the price of the security test the levels of support and resistance several times before a breakout. Once the security does break out of the range in either direction, however, it is considered to be trending in the direction of the breakout.

In a rectangular pattern, the price moves between two horizontal support and resistance lines. To qualify as a rectangle, both the lines support and resistance must be touched at least twice. Rectangular patterns have a narrow or wide price range and last from a few days to months. The pattern ends when the support or resistance line is broken.

A price breakout through resistance can be expected if volume increases when prices rise and contracts when prices fall within a rectangular pattern. An inevitable breakout of price above resistance can occur if prices do not fall to the support line before rallying again.

A tug of war between bulls and bears leads to the formation of rectangles. Bulls come in and push the price higher. When the price nears the support, bears take control pushing the price back down near the resistance level. Clever traders sometimes play these bounces by buying near the support and selling near the resistance.

A price breakout through support can be expected if volume increases when prices fall and contracts when prices rise in a rectangular pattern. An inevitable breakout of price below support can occur if prices do not rise to the resistance line before falling again.

The rectangular patterns clearly show the battle between bulls and bears: bulls are constantly buying when prices reach support, and bears are constantly selling when prices reach resistance. At some point, one of these groups will win and prices will break out of the model. The longer prices are in the pattern, the larger the breakout will be and the more significant the new support / resistance line becomes.

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