Rectangle patterns are simple. Throughout the Today’s Big Stock newsletters, one of the more common patterns discussed is the Rectangle. Traders like these patterns because trading them is very simple, clear and straightforward. The latest Rectangle pattern in the long list I have highlighted would be that of Ford Motor Company.
Ford Motor Company is a producer of cars and trucks. The company and its subsidiaries also engage in other businesses, including financing vehicles. Ford operates in two sectors: Automotive and Financial Services. Its Automotive Sector includes Ford North America, Ford South America, Ford Europe and Ford Asia Pacific Africa. Financial Services includes Ford Motor Credit Company and Other Financial Services. Ford North America includes the sale of Ford- and Lincoln-brand vehicles and related service parts in North America, together with the associated costs to develop, manufacture, distribute and service these vehicles and parts. Ford Motor Credit Company includes vehicle-related financing, leasing, and insurance. Other Financial Services Includes a variety of businesses including holding companies and real estate.
To review Ford’s stock, please take a look at the 1-year chart of F (Ford Motor Company) below with my added notations:
F has been trading within a sideways Rectangle for the last (3) months. Rectangle patterns form when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. What’s great about a Rectangle pattern is that it not only provides you with trading points of support & resistance, but it also gives clearly defined breakout & breakdown points. For F, the Rectangle pattern formed a $13 resistance (red) and a $12 support (green).
The Tale of the Tape: F has formed a very common chart pattern know as a Rectangle. This pattern shows clear breakout and breakdown points for a potential long or short position. The possible long positions on F would be either on a pullback to $12, or on a breakout above $13. The short opportunities would be either at $13 or on a breakdown below $12. With this type of pattern, some traders will commonly wait for the break of either the support or the resistance before making any trade.
Before making any trading decision, decide which side of the trade you believe gives you the highest probability of success. Do you prefer the short side of the market, long side, or do you want to be in the market at all? If you haven’t thought about it, review the overall indices themselves. For example, take a look at the S&P 500. Is it trending higher or lower? Has it recently broken through a key resistance or support level? Making these decisions ahead of time will help you decide which side of the trade you believe gives you the best opportunities.
No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade. Capital preservation is always key!
Christian Tharp, CMT