A rectangle formation is a consolidation formation, it occurs in both upward and downward trends. A rectangle formation implies that the stock price moves sideways with constant bottoms and constant peaks.
A valid rectangle formation must have at least two peaks and at least two bottoms. A rectangle pattern must have a decreasing volume during the formation. Two trend lines are drawn for a rectangle formation, one horizontal trend line along the bottoms and one horizontal trend line along the peaks.
The price target for a rectangle formation is calculated as the distance between the lower support level and the upper resistance level measured up or down from the outbreak level. A buy signal is generated when the resistance level is passed under increasing volume if the main trend is upward. A sell signal is generated when the support level is passed under increasing volume if the main trend is downward.
