What is the Rectangle Top (Bearish) Pattern?
The Rectangle Top pattern forms when the price of a security is stuck in a rangebound motion, and it bounces between support and resistance levels. Two horizontal lines are formed (top: 1, 3, 5) and (bottom: 2, 4) as a result. Depending on who gives up first – buyers or sellers – the price can Breakout in either direction.
This pattern is commonly associated with directionless markets. Usually the pattern performs better when there is a strong uptrend leading into the formation.
Trade idea
If price breaks out from the bottom pattern boundary, day traders and swing traders should trade with a DOWN trend. Consider selling a security short or buying a put option at the downward breakout price level. To identify an exit, calculate the pattern height by taking the difference between the support and resistance levels. Then, subtract the pattern height from the breakout price to estimate the target price.
To limit potential loss when price suddenly goes in the wrong direction, consider placing a stop order to buy back a short position or sell a put option at or above the breakout price.
Disclaimers and Limitations
Contributor
Sergey Savastiouk, Ph.D. has a degree in Applied Mathematics from Moscow University and has extensive experience as an entrepreneur, investor, manager, and mathematician. His professional expertise is in applied mathematics, mathematical modeling, system and pattern analysis, and software and hardware system integration. He has served as the CEO of several hi-tech start-up companies and nonprofit organizations, which has given him proven capabilities in business strategy for high-tech start-up companies, market assessment, company formation, team building, product development, marketing, and sales. He has published numerous articles in journals and magazines on related fields. As a retail investor, he spent 15 years developing his proprietary trading and quantitative algorithms (now Tickeron’s A.I.), which brought him significant returns in trading the stock market. His current work and goal in founding Tickeron is to bring professional, sophisticated stock market analysis capabilities to retail investors via an easy-to-use interface.
