I just got my magazine TECHNICAL ANALYSIS OF STOCKS AND COMMODITIES JUNE, 2007. On page 17 is a perfect article to support the Darvas theory as described in previous posts. If you want to find out more about the theory, search "Darvas" in the search area in the upper left hand corner of this blog and it will bring up all the blogs with Darvas in them.
So here is what the article by Markos Katsanos had to say about "rectangles".
FORMATION CHARACTERISTICS:
1. Breakouts are triggered by news or some event.
2. At least two points are required to define each line, but three points are more common.
3. Rectangles can be either a CONTINUATION or a REVERSAL pattern.
4. RECTANGLES ARE MORE OFTEN A CONTINUATION RATHER THAN A REVERSAL BY A 1.5 TO 1 MARGIN. Meaning, if the previous trend was up, the breakout will probably be towards the upside.
VOLUME:
1. Trading volume declines as the pattern develops.
2. The average trading colume during the consolidation declines to 90% of the usual trading volume.
3. A BREAKOUT on LOW volume is suspect (support for the Darvas theory)
4. It is usual for the berakout voluem to surge as much as 2 to 3 times the average volume in the rectangle.
DURATION:
1. Can last 3 months to one year.
2. AVERAGE WAS 6 MONTHS.
STOCK CHARACTERISTIC:
1. HIGHER PRICED STOCK IS MORE LIKELY TO BREAKOUT IN DIRECTION OF PREVIOUS TREND.
2. Lower priced stocks are more likely to experience a reversal of the previous trend.
PULLBACKS AFTER BREAKOUT:
1. Once a breakout from a rectangle occurs, there is normally a "pullback" where the stock will retrace for 4 TO 5 DAYS and then resume the direction of the breakout.
2. Pullbacks lasted 2 days on average and for an average of a 3.6% pullback.
3. Trading volume contracts 50 to 80% from the volume on the day of the breakout.
Here is an example of a stock that has just broken out of a 3 month rectangle and is currently in a pullback creating a perfect buying opportunity. double click on the image to enlarge it.
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