Strong excess return following buy signals from rectangle formations

Published 17 October 2019

New research results from Investtech show that stocks with buy signals from rectangle formations in the Nordic markets statistically have given strong excess return. Buy signals from rectangle formations identified in Investtech’s short term price charts in the Nordic markets have given an annualised excess return of 16.7 percentage points in the period 1996-2018.

Identification of geometric price patterns in stock prices is an important area of technical analysis. The idea is that these patterns describe the investors’ mental state, i.e. whether they will want to sell or buy stocks in the time ahead, and they thereby indicate the future direction of the stock price. Rectangle formations are one type of such patterns.

The development of a rectangle formation indicates that the investors are unsure about the future direction of the stock. The price moves sideways between a support level and a resistance level. A break upwards mirrors the investors’ increasing optimism. According to technical analysis theory, the price will then rise by at least as much as the height of the rectangle, see figure 1.

Investtech’s algorithms identify such formations for you. In our price charts, rectangle formations are shown by code REC and, in the case of buy signals, a green upwards arrow. The arrow shows theoretical price target. A current example may be Bank of America, which triggered a positive signal from a rectangle formation on Oct 16.

Figure 2: Bank of America Corp. (BAC.US) Close: 30.17 (+0.44), Oct 16, 2019

Our subscribers can find stocks with these positive signals using for instance the tool Signals.

We wanted to study the statistical results yielded by these buy signals and therefore studied return from Norwegian, Swedish, Danish and Finnish stocks following buy and sell signals from rectangle formations identified in Investtech’s price charts in the short, medium and long term. We had up to 23 years of data, from 1996 to 2018.

The chart below shows average price development following buy signals from rectangle formations identified in Investtech’s short term price charts in the Nordic markets. The signals are triggered on day 0. Only days when the exchange is open are included, so 22 days equal approximately one month. The thick blue line shows the development of buy signal stocks. The shaded areas are the standard deviation of the calculations. The thin blue line shows benchmark development in the same period as the buy signal stocks.

Buy signals from rectangle formations in the short term have given an excess return of 1.2 percentage points after one month, equal to an annualised excess return of 16.7 percentage points.

Buy signals from rectangle formations in the medium term have given an excess return of 2.3 percentage points after three months, equal to an annualised excess return of 9.8 percentage points.

In the long term, buy signals from rectangle formations have given an excess return of 2.7 percentage points after three months, equal to an annualised excess return of 11.6 percentage points.

Our research shows high probability that signals from rectangle formations in Investtech’s price charts will continue to give good indications of future price development. Stocks with buy signals from rectangle formations will statistically give strong excess return!

Please find more details and results in the research reports here:

Rectangle formations, short term

Rectangle formations, medium term

Rectangle formations, long term