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The Island Reversal

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The Island Reversal

An island reversal is a candlestick pattern that can help to provide an indication of a reversal.

The Island Reversal

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 $91.00 the following day and then does not fall below its opening. Near the end of the day, it moves up further and touches $97.00 but closes at $96.00 however. Observation thus shows a gap of $7.00 which is not filled. On the following day market price open at $94.00, touches high of $96.00 and closes at $90.00. A few days later or the very next day, market price opens at $84.00 and closes at $83.00, keeping itself below the area of $91.00 and $84.00. All the trading above $91.00 will appear on the Technical analysis chart to be isolated and is known as, “The Island Reversal.”

Caution

This can be compared with the scenario that on reaching an island, a boat will leave it immediately after unloading some of its load. This entire process is very rapid. A crew member engaged in trading onshore if left behind in the frenzy will be subject to mental stress on how to transport his bargained goods. Even if he manages to swim against the waves of worries and reaches the boat along with his purchases, he shall incur losses by damage to the items.

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