The Rectangle Top Pattern
Beginning in February of 2011, Amcor Limited (AMC.AX) underwent several broadening and consolidation patterns in succession as the market attempted to find an identity as well as a stable price. Not coincidentally, the breakouts provided the only significant up or down price change for the stock over the six-month stretch from February to August 2011.Â
Beginning during the second week of February, AMC fluctuated between the 7.300 and 7.400 range before expanding into a broader range of price movement. At its peak, AMC reached resistance at 7.705, and at its nadir, just above 7.000. Several gap ups and gap downs occurred during this period, underscoring the marketâ€™s turbulent atmosphere and instability. By the end, AMC had formed a Broadening Top pattern with a downward breakout. Multiple points of contact were established on both upper and lower diverging trend lines, legitimising the formation.
The breakout performance was weak, another characteristic of Broadening Tops. Generally speaking, Broadening Tops and Bottoms perform their poorest in a bull market. This just happened to be the market that AMC was undergoing leading to the appearance of the Broadening Top. Thus, the breakout did not extend very far downward nor did it develop for very long.
What it did develop, however, was a Rectangle Top pattern. Rectangle Tops are also known as horizontal channels or sideways trading. They reflect the marketâ€™s inability to apply a majority pressure on behalf of either buyers or sellers, and as a result price trades within a narrow corridor before breaking out. In the case of AMC, it trades roughly between the levels of 7.300 and 7.600, but mostly within the range of 7.350 and 7.550. They are considered to be bullish continuation patterns, and according to Thomas Bulkowski, famed technical analyst, they break upward nearly 70 percent of the time. He also notes that price activity should touch both trend lines a minimum of two times throughout the horizontal progression, a requirement met by this Rectangle Top. When it comes to the breakout, however, AMC trends against the norm.
Rather than breaking upward, AMC makes use of the 32 percent chance of a downward breakout by gapping down twice and plunging to around the 6.950 level. Breakouts for Rectangle Tops are of moderate strength, so in a typical market price activity would have seen further decreases. In AMCâ€™s environment, however, market participants were not quite ready to initiate a sell-off. As a result, price rebounded and began trading again between the 7.200 and 7.600 range.
Eventually, price action formed a Consolidating Symmetrical Triangle pattern, highlighting the marketâ€™s inability to turn bearish or bullish for good. As price neared the convergence of the trend lines, trading occurred nearly exclusively between the 7.300-7.400 level. The breakout occurred in late July with another downtrend, this one registering a very significant price movement.
It is slightly less common for Consolidating Symmetrical Triangles to break downward than upward; regardless, this Symmetrical Triangle defies statistics and gaps down two times before transitioning into a developing Broadening Bottom pattern. At the chartâ€™s conclusion, the Bottom had established four points of contact with the upper and lower trend lines (two each). While evidencing a temporary win for the bears via the drop in price, it shows the marketâ€™s inability to keep price on a downward march, instead reverting to continued instability.
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