Rectangle formation

A rectangle formation marks a market consolidation. The formation triggers a buy signal when broken upwards and a sell signal when broken downwards.

In a market consolidation the amount of buyers and sellers are equal. Price fluctuations are determined by lesser news and short term impulses. After a while, support will form on the floor of the rectangle, where many find the stock to be cheap. At the same time, resistance will form near the rectangle ceiling, where many find the stock to be expensive.

Long term investors, both buyers and sellers, will after some time get into position. When they are happy, volume will be reduced. At the same time, pressure is building in the stock. It is not natural for stock prices to remain in the same place. And it is not natural for investors, especially short term investors, to keep stocks where nothing is happening.

A buy signal is triggered when the price breaks upwards from the rectangle. It signals increased optimism and buyers who are willing to pay more to get stocks. The consolidation is over and many have waited for something to happen. Thus the stock can rise quickly. Especially at increasing volume, this a good signal for further rise.

Similarly, a sell signal is triggered when the price breaks downwards from the rectangle.