Buy signal from rectangle formation

A buy signal from a rectangle formation signals increasing optimism among investors and signals that the stock continues or enters a rising trend.

A stock that has triggered a buy signal from a rectangle formation is indicated to rise further. This is especially the case when the stock price is already in a rising trend channel. Investors have experienced a positive surprise which has triggered the signal, and optimism is on the increase.

Details

Volume is a good indicator of the strength of the buy signal. High volume on rising prices indicates that aggressive buyers keep paying more in order to buy. This is positive for further development. High volume and positive volume balance will strengthen a buy signal.

Rectangle formations are usually continuing formations. This means that the price usually continues in the long term direction, or the long term trend, it was in before the formation. Rectangle formations that trigger buy signals in rising trends are therefore seen to give stronger signals than rectangle formations that trigger buy signals in falling trends.

Small rectangle formations can trigger false buy signals. This is especially the case when the formation is small, when the stock remains in a falling trend channel, and when volume development is negative. At buy signal from a rectangle formation the stock as a whole should be assessed, not solely the buy signal. Many investors have bought long term losers too soon following weak buy signals from rectangle formations. The following applies:

• Long rectangle formations are stronger than short ones.
• Buy signals with positive volume development are stronger than buy signals with negative volume development.
• Buy signals when the chart shows a rising trend are stronger than when the chart shows a falling trend.
• Buy signals with a break upward though a falling trend, including break above the previous pivot top, are stronger than if trend and pivot top are not broken.