The Rectangle pattern is defined by two parallel lines that run horizontally through peaks and bottoms. Each trendline needs to contain at least two peaks or bottoms. While the perfect picture of the Rectangle, where the overall signal strength is set to maximum, suggests that trendlines be strictly horizontal, in real life they might have a slight slope. Note that in this case they still need to be parallel and the performance will be somewhat impaired.
Rectangles are known for their versatility: they serve as both continuation and reversal patterns in both uptrend and downtrend conditions. Odds of reversal or continuation in downtrend are statistically about the same, but in the uptrend, the continuation scenario is more probable. Since the statistics are not too helpful, it might be a good idea to look for some early warnings. Fortunately, Rectangles act like Channels in this matter: price shortfalls often predict the breakout direction. In downtrend, failure to reach either trendline signifies with good probability that price will break through the other. Things are a bit more complicated when the preceding trend is upward: failure to reach the lower line usually correctly predicts the breach of the upper, while odds of breaking through the lower line after a partial rise are only satisfactory.
In both uptrends and downtrends, volume is more likely to fall over the course of the pattern formation. When the preceding trend is downward, heavy volume at breakout substantially improves the strength of signal. After the uptrend, however, volume at breakout does not seem to help.
For educational purposes only. Not a recommendation of a specific security or investment strategy.
Technical analysis is not recommended as a sole means of investment research.
Past performance of a security or strategy does not guarantee future results or success.