Rectangles tend to be continuation patterns, appearing as trading ranges or consolidations at the top or bottom of a trend. Trading a rectangle depends on the direction of the breakout.
From June 24 to August 15, Xcel Energy (EXL) began exhibiting a rectangle formation–a flat top at around 62.00 and bottom around 58.80, the top tested three times and the bottom tested twice.
With price having just broken out toward the upside, what are the more common tactics to use when it comes to trading a rectangle? A classic solution would be to take the height of the entire formation–in this case, 3.20–and add it to the high at 62.00. This would give you a price target of 65.20, or 100% of the pattern height. A more conservative solution would be to take only 80% of the height–around 2.56–adding that to the high which would give you a price target of 64.56 (see dotted line).
Again, this is a classic technical chart pattern reading, and it doesn’t take into account any fundamental factors that may affect the stock. Every pattern has a failure rate. But if you were curious about trading a rectangle at the top of an uptrend, well, now you know one way to do it.
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