A rectangle is another standard technical analysis pattern.  A rectangle is defined by a series of highs and lows where each high is at approximately the same price as the other highs, and each low is at approximately the same price as the other lows.  We report a rectangle pattern after seeing at least 5 consecutive highs and lows.

If the last turning point was a low, we call the pattern a rectangle bottom, and we draw a green icon to show that the price is going up.  If the last turning point was a high, we call the pattern a rectangle top, and we draw a red icon to show that the price is going down.  Each time we add another point to the rectangle, the direction changes.

Rectangles are similar to consolidation patterns, because they both show a stock trading in a channel.  However, we use completely different algorithms to build the two types of channels.  The consolidation algorithm depends heavily on the volatility of the stock, comparing the amount that the stock price moved recently to the amount that we would expect it to move.  A consolidation pattern can become stronger if the price just stays inside the channel.  A rectangle pattern depends more on the specific prices near the edges of the pattern.  The only way to confirm a rectangle pattern is for the price to move up and down through the entire range of the rectangle.  A rectangle might not be a consolidation pattern if the rectangle is too tall.  A consolidation might not be a rectangle if the top and bottom edges are not precise enough.

We use the channels from our consolidation algorithm to create channel breakout alerts.  This algorithm is good at finding a specific interesting price level.  Our rectangle algorithm is best at exactly the opposite.  The rectangle alert tells you that the channel has been confirmed, and the price is moving back inside the channel.

The analysis and reporting of rectangle patterns is very similar to the analysis and reporting of broadening patterns, described above.