Stock Chart Pattern--What The Current Stock Market Is In Right Now!
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Stock Chart Pattern
Rectangles are sometimes referred to as downside breaks, upside breaks, slim jims, trading ranges, consolidation zones or congestion areas.
Trend
1. 96% of the time, they break in the direction of the primary trend.
2. To qualify as a continuation pattern, a prior trend should exist.
3. The longer the rectangle takes place (sometimes referred to as trading ranges, consolidation zones, downside breakout or slim jims,) the larger to move to be expected.
4. In the rectangles that I have studied, these typically are the highest probability pattern (keeping in mind we have identified over 4 million-chart patterns.)
Volume
(i) Sometimes volume will decline as the pattern develops. Other times volume will gyrate as the prices bounce between support and resistance.
(ii) A strong volume spike on the day of the pattern confirmation is a strong indicator in support of the potential for this pattern. The volume spike should be significantly above the average of the volume for the duration of the pattern. In addition, the volume during the duration of the pattern should be declining on average.
Duration
Rectangles can extend for a few weeks, months and even years.
1. Short Term Traders (1-3 Months)—Look on daily charts for these patterns.
2. Intermediate Term Traders (3-12 Months)—Look on mostly on weekly charts for these patterns.
3. Investors (12 months or longer)—Look on monthly and weekly charts for these patterns.
Breakout/Breakdown Expectations
(i) The longer the pattern, the more significant the breakout.
(ii) The "narrowness" of the trading range can also be used to gauge the breakout. To determine the narrowness of the trading range compare the upper boundary with the lower boundary of the trading range. If the trading range has a large difference between the upper and lower boundary (making it wide) then the breakout is considered weaker and less reliable.
(iii) A 3-month pattern might be expected to fulfill its breakout projection.
(iv) However, a 6-month pattern might be expected to exceed its breakout target.
(v) 12 months or more of this consolidation can lead to major longer lasting bull and bear markets within stocks, sectors, currencies, commodities and any type of index.
Breakout Direction: The direction of the next significant move can only be determined after the breakout has occurred. Volume patterns can sometimes offer clues, but there is no confirmation until an actual break above resistance or break below support.
Things To Consider Before You Trade
Consider keeping trading light in these patterns because they form in four different type of overlapping wave structures
3 wave structures (common for this pattern if duration is less than 3 weeks)
5 wave structures (common for this pattern if duration is less than 5 months)
7 wave structures (common for this pattern if duration is less than 12 months)
13 wave structures (once in a lifetime rectangle rarely seen.) but when you do you won’t believe your eyes at what actually happens (birth of major bull and bear markets.) I call these the “parents.” Goes without saying “strict parents” in the case of the bear “no curfew” parents in the case of the bull.
Back Test And Targets
They never fail to always do a back test. Or what we call a “Return to Breakout/Breakdown.” A return to or near the original breakout level can offer a second chance to participate.
The estimated move is found by measuring the height of the rectangle and applying it to the breakout/breakdown and applying the 1L, 2L, 3L, and 4L method.
1L (3 wave structures common for this pattern if duration is less than 3 weeks will typically breakout/breakdown by measuring the height of the pattern from top to bottom and then applying that distance to the move in which it broke.)
2L (5 wave structures common for this pattern if duration is less than 5 months will typically breakout/breakdown by measuring the height of the pattern from top to bottom and then applying that distance to the move “Times Two” (X2) in which it broke.)
3L (7 wave structures common for this pattern if duration is less than 12 months will typically breakout/breakdown by measuring the height of the pattern from top to bottom and then applying that distance to the move “Times Three” (X3) in which it broke.)
4L (13 wave structures (once in a lifetime rectangle rarely seen) for this pattern if duration is more than 10 years will typically breakout/breakdown by measuring the height of the pattern from top to bottom and then applying that distance to the move “Times Four” (X4) in which it broke.)
During Our Next Weekly Update We Will Review How To Profit From These Upcoming Parabolic Moves