Rectangles/Trading Ranges Technical Formations

A Rectangle is formed when technical trend lines are drawn through two or more tops and two or more bottoms. The trend lines are horizontal and parallel. (See the chart of Johnson & Johnson, NYSE: JNJ) This formation is created when (1) a large group of sellers/holders of the stock are convinced that the stock is overpriced when it gets to the upper horizontal line, and they are ready to Sell- at that level, creating a valid Resistance, called Distribution Area, and (2) when a large group of buyers becomes convinced that the stock hit very attractive low and the current low price coinciding with the bottom line, and they are ready to Buy+ creating a valid Support level, called Accumulation Area. Therefore, the space between these two levels becomes a Trading Range. There are cases when the difference between the price at the upper level and the price at the lower level is just a few dollars, indicating that the supply and demand for the stock are in relative balance. During that period of time you could trade the stock as Selling- at the Top and Buying+ at the Bottom. Eventually, the forces of supply and demand become unbalanced, usually because of a major event concerning the stock - upgrade by a brokerage firm, a major news event, rumors, etc. If the price then breaks out in the same direction it was moving before it formed the rectangle, the rectangle has served as a continuation formation. If the price breaks out in the opposite direction, the rectangle has functioned as a reversal formation. In view of the above, I am to remind again how to trade stocks already established Rectangle formation: As soon as the formation is established, try to Sell- at the Top when the stock reaches the upper level, but it did not confirm a breakout - I usually Sell- a point below that level. The opposite is true as well - as soon as the stock reaches the Bottom-Support, you could Buy+ after a successful bounce off that Bottom-Support - I usually Buy+ a point above that level! Some experts advise to Buy+ after a stock has moved 5% above the Resistance-Upper Level or Sell- after a stock has moved 5% below the Bottom-Support Level.