Sell signal from rectangle formation

A sell signal from a rectangle formation signals increasing pessimism among investors and signals that the stock continues or enters a falling trend.

A stock that has triggered a sell signal from a rectangle formation is indicated to fall further. This is especially the case when the stock price is already in a falling trend channel. Investors have experienced a negative surprise which has triggered the signal, and the level of fear is increasing.

Details

Volume is a good indicator of the strength of the sell signal. High volume on falling prices indicates that aggressive sellers keep reducing the price in order to sell. This is negative for further development. High volume and negative volume balance will strengthen a sell 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 sell signals in falling trends are therefore seen to give stronger signals than rectangle formations that trigger sell signals in rising trends.

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

• Long rectangle formations are stronger than short ones.
• Sell signals with negative volume development are stronger than sell signals with positive volume development.
• Sell signals when the chart shows a falling trend are stronger than when the chart shows a rising trend.
• Sell signals with a break downward from a rising trend, including break below the previous pivot bottom, are stronger than if trend and pivot bottom are not broken.