Rectangle
Rectangles, just like triangles are patterns which portray corrective movements on the markets. The only difference between them is the shape.
A rectangle is characterized by horizontal trend lines linking tops (Resistance) and bottoms (Support). This is a signal to market uncertainty where the fight between the bulls and bears should be decided. Due to the fact that trends tend to keep their direction more often then change, then we can conclude that continuation patterns like the rectangle are usually broken in the same direction as the trend.
I will try to explain the interpretation of this pattern based on the above given diagram.
If the resistance level (upper line) is broken in the diagram above then:
- If the investor has a long position open, then this will be an assurance that the position should be held and that the bulls are growing in power.
- If the investor does not have any position, then opening a long position is possible.
On the other hand if the support level (bottom line) of the rectangle is broken then:
- If the investor has a long position open, then this will be the first signal that the bulls are losing power and that the position may be closed.
- If the investor does not have any position, then in my opinion nothing should be done, because breaking the bottom line is only an initial signal of trend change.
This is a very basic presentation of the rectangle and what has to be mentioned is that in advanced technical analysis, together with the use of other various tools such as the Fibonacci retracement, Elliot’s waves and many more the rectangle becomes a very helpful tool in opening market positions.
These advanced methods help investors in:
- Deciding where to open a position on the market.
- Deciding where to adjust the stop loss to the open position.
- Deciding which market levels can be reached and where support and resistance can be encountered.
For any questions or remarks write to:
Omar Arnaout
Omar.arnaout@xtb.com