Rectangle Formation

Rectangle Formation

Also known as a trading range (or congestion), the rectangle formation
reflects a consolidation period. Upon breakout, it is likely to continue the
original trend. Its failure will change it from a continuation to a reversal pattern.

This pattern is easy to spot, as it can be considered a minor side-ways trend.
If it occurs within an uptrend and the breakout occurs on the upside, it is
called a bullish rectangle. (See Figure 5.32.) The price objective is the height of
the rectangle. As Figure 5.32. shows, the currency moves between welldefined,
flat support and resistance levels. A valid breakout may occur on
either side from this consolidation period. The price target (GH) is equal to the
height of the rectangle (G'H), measured from the breakout point H. In the
numerical example, the price objective is 1.6200, as the 100-pip difference
between 1.6100 and 1.6000, measured from 1.6100.
If the consolidation occurs within a downtrend and the breakout continues
the original trend, then it is called a bearish rectangle. (See Figure 5.33.) As
shown in Figure 5.33., the currency moves between well-defined, flat support
and resistance levels. A valid breakout may occur on either side of this
consolidation period. The price objective (HG') is equal in size to the height of the
rectangle (GH), measured from the breakout point H. In the numerical example,
the price objective is 100.00, as the 100-pip difference between 102.00 and
101.00, measured from 101.00.