Published April 24, 2019
In technical analysis there are only two independent factors, price and volume, that can be studied on their own. Now in price itself can be found many patterns that can be used as a good entry or exit tool. And to accompany such patterns, volume is another factor that one must not forget at any point. Volume reflects the quality of the breakout, if there is overweight of buyers or sellers.
A rectangle formation is one of the most popular and easy to identify price patterns that are created when buyers and sellers of the stock are balanced over time. In other words, one can say there is indecisiveness among investors and traders as to which way the price should move. Hence a sideways move.
Technical analysis theory suggests that investor psychology is about to change when the price breaks out from such formations. Such breakouts are considered stronger if they are accompanied by a surge in volume whether its a buy or a sell signal. Target from the formation (as shown in the image below) is the height of the formation projected from the point of breakout/breakdown.
Background and outcome: A report based on 12 years of data from the National Stock Exchange in India shows that stocks with buy signal (3,717 buy signals identified) from rectangle formations on average have risen by 4.9 per cent after three months, while stocks with sell signal (3,004 sell signals identified) from rectangle formations have fallen 0.5 per cent. There is an excess return of 1.8 percentage points compared to benchmark, which on average increased by 3.1 per cent.
Below is the graph that shows results from Investtech's automatic algorithms in medium term charts. The signals are triggered on day 0. Only days when the exchange is open are included, so 66 days equal approximately 3 months. Buy signals are the blue line and the sell signals are the red one. The shaded areas show the standard deviation for these calculations. The black line is the benchmark index.
Annualized return: The table below shows annualized return and excess return in percentage points (%p). Annualized return is calculated by repeating the 66 day return four times. Excess return is calculated by subtracting average 66 day return of benchmark index four times. Buy signals gave an annualized excess return of 8.0 percentage points, while sell signals gave negative returns of 15 percentage points with respect to the benchmark Nifty 50 index.
%p: percentage points
Our opinion: Based on historical prices for stocks on the National Stock Exchange in the period 2007 to 2018, stocks with buy signals from rectangle formations have clearly outperformed benchmark the following three months. Similarly, stocks with sell signals from rectangle formations have underperformed.
Complete report available here.
As you navigate through our menu on the Indian page of our website, you can click on 'signals' and choose between positive or negative stocks, breakouts from different price formations and different time frames. This will give you an overview of stocks that match with your preset criteria.
On the same note we now analyze two stocks that have recently given breakout from rectangle formations.
ABB India Limited is within an approximate horizontal trend channel in the medium and long term. The stock has given a buy signal via a breakout from a rectangle formation and closing above the resistance of 1440 rupees. Further rise to 1669 or more is signalled. On the downside there is support between 1440 and 1330.
The breakout in price was accompanied by a rise in volume. This suggests that more people were interested to buy the stock and did not want to be left behind. In addition, RSI is above 70 after a good price increase the past weeks. The stock has strong positive momentum and further increase is indicated. The stock is overall assessed as technically positive for the medium term.
Recommendation one to six months: Positive
Motilal Oswal Financial Services Limited has broken through the ceiling of a falling trend channel in the medium and long term. The stock has given a positive signal from a rectangle formation by a break up through the resistance at 690. Further rise to 832 or more is signalled. The stock is between the support at rupee 700 and the resistance at rupee 750. A definitive break through of one of these levels predicts the new direction.
RSI is above 70 after a good price increase the past weeks. The stock has strong positive momentum and further increase is indicated. The RSI curve shows a rising trend and the volume balance indicator is also positive. Combined these indicators support the positive trend. The stock is overall assessed as technically positive for the medium term.
Recommendation one to six months: Positive
We will be publishing a similar report by the end of this week for stocks in rising and falling trend for NSE listed stocks, and how much return they have given in the coming three and twelve months.
The analyses are based on closing price as per April 23, 2019. Maintaining proper stop loss is always recommended.
Die Anlageempfehlungen werden von Investtech.com AS ("Investtech") ausgearbeitet. Investtech übernimmt keine Haftung für die Vollständigkeit oder Richtigkeit der jeweiligen Analyse. Ein etwaiges Engagement aufgrund der aus den Analysen resultierenden Empfehlungen/Signale erfolgt zur Gänze für Rechnung und Risiko des Anlegers. Investtech haftet nicht für Verluste, die sich direkt oder indirekt infolge der Nutzung von Investtechs Analysen ergeben. Angaben zu etwaigen Interessenkonflikten gehen stets aus der Anlageempfehlung hervor. Weitere Informationen zu Investtechs Analysen finden Sie unter disclaimer.
Die Anlageempfehlungen werden von Investtech.com AS ("Investtech") ausgearbeitet. Investtech übernimmt keine Haftung für die Vollständigkeit oder Richtigkeit der jeweiligen Analyse. Ein etwaiges Engagement aufgrund der aus den Analysen resultierenden Empfehlungen/Signale erfolgt zur Gänze für Rechnung und Risiko des Anlegers. Investtech haftet nicht für Verluste, die sich direkt oder indirekt infolge der Nutzung von Investtechs Analysen ergeben. Angaben zu etwaigen Interessenkonflikten gehen stets aus der Anlageempfehlung hervor. Weitere Informationen zu Investtechs Analysen finden Sie unter disclaimer.