RECTANGULAR PATTERN ON WEEKLY BASIS
Tools – Candlestick/Bar Chart, ADX (14) and MACD Oscillator with standard settings
Trade Setup – The basics of this setup is very easy to understand. All you need to do is monitor selective stocks (high beta high volume) or the Index. The pattern to look out is usually a horizontal range in which the particular entity trades and then gives a breakout in either direction. This pattern is extremely effective and provides with good risk/reward ratio. I chose high beta stocks to cash in on the moves as quickly as possible.
Time Validity - I trade this pattern only on weekly charts. The reason behind this is simple. The more the data, the more reliable the pattern. Thus data and patterns on monthly charts are certainly more reliable than weekly chart. Some analysts do say that the weekly pattern should not extend beyond certain weeks. However, my research indicates that this condition may or may not hold true. Personally, I prefer the formation rather than the time frame.
When does it occur - This pattern can be found during consolidations, new highs and new lows. Some books do indicate that these patterns are typically consolidation patterns but I have found these patterns effective in nearly every situation.
How to trade it - Refer to the chart below. What we see is that HCC forms a bottom by forming a rectangle pattern. Usually there must be 4 points of contact in the pattern (as marked in the figure). However, in some extreme cases I have seen points stretching to 6-8. Volumes during the pattern should diminish and the NDI should be greater than PDI. Though NDI is greater than PDI, the stock instead of falling further consolidates in a range. This usually is the first clue for the stock validating the pattern. As the pattern develops and begin to show strength, the volumes, ADX (14) and PDI all start to pick up. This is usually the second clue and beyond this only the breakout confirmation is required. The breakout confirmation is usually recommended as validation of pattern breach. However, I personally prefer to see a gap up breach (check chart). I have found that gap up along with the previous clues mentioned works exceptionally well for this pattern. The stock usually runs up quite fast and doubles in near term. Though the gap up is rare, but if you find one, then latch on to it. Keep in mind the slope of MACD while buying. It should be positive and should have an upward bias.
Target - Add the range of the rectangle to the breaching level. This is the minimum target that can be achieved. The maximum cannot be predicted.
STOPLOSS - I would prefer not to refer to stop loss levels as every trader is different in having his own rules of money management. Please use your own rules for managing equity.
Usage - This pattern is effective in weekly and daily trades. However, I have also had considerable amount of success using it on intraday basis. If someone wants, I'll post how to use this in intraday setups.