Bulkowski’s Rectangle Tops

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Rectangle tops (or horizontal channels), so called because price enters the pattern from the bottom (creating a top), are mid list performing chart patterns. The break even failure rate is higher than other chart patterns, but the average rise in a bull market is quite good. Downward breakouts have a good performance rank because the change after the trend is a very high 57%. For more information see pages 579 to 594 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Rectangle top chart pattern

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Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 12 out of 23; 6 out of 21

Break even failure rate for up/down breakouts: 9%; 11%

Average rise/decline: 39%; 17%

Throwback/pullback rate: 64%; 58%

Percentage meeting price target for up/down breakouts: 80%; 63%

Identification Guidelines

Characteristic	Discussion
Price trend	Upward 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 70% of the time.
Breakout	Upward 68% 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 (B, upward breakouts) or subtract it from the bottom trendline (A, 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 perform better than short ones.
Volume shape	Rectangles with a random volume shape and upward breakout perform best.
Yearly low	Rectangles with upward breakouts within a third of the yearly low perform best but samples are few. Downward breakouts do best near the yearly low.
Partial rise/decline	A partial rise predicts a downward breakout 61% of the time; a partial decline correctly predicts an upward breakout 89% of the time.
Throwbacks and pullbacks	Throwbacks and pullbacks hurt postbreakout performance.

The Measure Rule

Example

Rectangle top chart pattern example

The above figure shows an example of a long rectangle top chart pattern. Price bounces between two parallel trendlines for what seems like forever, but it sets up for a strong move upward when price finally pierces the top trendline.