Island Reversals

In general terms, island reversal can be defined as a compact trading activity within a range of prices, separated from the move proceeding it; this separation is caused by an exhaustion gap and the subsequent move in the opposite direction occurs as a result of a breakaway gap.

Island Reversals stocks

 

 

 

 

 

The Island Reversals

Formation

Close scrutiny of island reversal formations shows that the island reversal consists of an exhaustion gap and the subsequent move is followed by a breakaway gap. Uncommonly, the breakaway gap that completes the island is filled in a few days by a pull back as a result of the reaction. The island reversal can occur at the peak or the reverse of head and shoulders formations.



For example, assume that the price in a rising trend closes at its high of $84.00 and opens at $86.00 the following day and then does not fall below its opening. Near the end of the day, it moves up further and touches $88.00 but closes at $87.60 however. Observation thus shows a gap of $2.00 which is not filled. On the following day market price open at $87.40, touches high of $88.90 and closes at $87.00. A few days later or the very next day, market price opens at $84.00 and closes at $82.90, keeping itself below the area of $86.00 and $84.00. All the trading above $86.00 will appear on the technical analysis chart to be isolated and is known as, an island reversal.

Characteristics

  • The occurrence of an island reversal is rather rare.
  • It consists of a minor move.
  • It is not, in itself of major significance.
  • It can occur at the top as well as at the bottom.
  • The gaps at either end occur at almost the same price level.
  • It has a compact trading activity that is separated from the subsequent move which is in the opposite direction.
  • It is an extremely good indicator of a reversal of primary or intermediate trend.
  • As soon as it appears, it indicates that an extreme change in the sentiment has occurred.
  • High volume is expected in that compact trading area.
  • The trading activity may last for only a single day or a couple of days. When this arrangement occurs for only a single day, it is known as “one day reversal”.

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*This guide is mainly based on wikipedia’s texts & images. We thank the authors. for their great efforts.