Bulkowski’s Rectangle Bottoms

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Rectangle bottoms, so called because price enters the pattern from the top, are mid list performing chart patterns. The failure rate is higher than other chart patterns, but the average rise in a bull market is quite good. However, rectangle bottoms (or horizontal channels) are rare. For more information see pages 563 to 578 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Rectangle bottom chart pattern

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Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 11 out of 23; 12 out of 21

Break even failure rate for up/down breakouts: 10%; 16%

Average rise/decline: 46%; 14%

Throwback/pullback rate: 53%; 69%

Percentage meeting price target for up/down breakouts: 85%; 50%

Identification Guidelines

Characteristic	Discussion
Price trend	Downward leading to the chart pattern.
Shape	Prices have flat tops and flat bottoms, crossing the pattern from side to side following two parallel trendlines.
Trendlines	Two near horizontal trendlines bound price action.
Touches	Price should touch each trendline at least twice using distinct peaks and valleys.
Volume trend	Trends downward at least 66% of the time.
Breakout	Downward 55% of the time.

Trading Tips

Trading Tactic	Explanation
Measure rule	Compute the height between the two trendlines (A and B in the measure rule figure to the right) and then multiply it by the above “percentage meeting price target.” Add it to the price of the top trendline (A, upward breakouts) or subtract it from the bottom trendline (B, downward breakouts) to get a target price (C).
Wait for breakout	Since the breakout can be in any direction, wait for price to close outside the trendline before taking a position.
Intrapattern trade	If the rectangle is tall enough, buy at the bottom trendline and sell at the top one, then reverse the trade.
Height	Tall patterns with upward breakouts perform substantially better than short ones.
Volume trend	Rectangles with a rising volume trend outperform regardless of the breakout direction.
Volume shape	Rectangles with a random volume shape perform best regardless of the breakout direction.
Breakout volume	Heavy breakout volume pushes price farther regardless of the breakout direction.
Yearly middle	Rectangles with upward breakouts in the middle of the yearly price range perform best. Downward breakouts do best near the yearly low.
Partial rise/decline	A partial rise predicts a downward breakout 83% of the time; a partial decline correctly predicts an upward breakout 81% of the time.
Throwbacks and pullbacks	Throwbacks and pullbacks hurt postbreakout performance.

The Measure Rule

Example

Rectangle bottom chart pattern example

The above figure shows an example of a rectangle bottom chart pattern. Price bounces between two parallel trendlines. Few chart patterns are perfect and the one shown has price peaking out the top at B. A pullback at A allows traders another opportunity to exit a position before the downtrend resumes.