The Island Reversal
Encyclopedia
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
.
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.
Gaps (Technical analysis)
A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap....
and the subsequent move in the opposite direction occurs as a result of a breakaway gap
Gaps (Technical analysis)
A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap....
.
Formation
Close scrutiny of island reversal formations shows that the island reversal consists of an exhaustion gapGaps (Technical analysis)
A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap....
and the subsequent move is followed by a breakaway gap
Gaps (Technical analysis)
A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a 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 gapsGaps (Technical analysis)A gap is defined as an unfilled space or interval. On a technical analysis chart, a gap represents an area where no trading takes place. On the Japanese candlestick chart, a window is interpreted as a gap....
at either end occur at almost the same price levelPrice levelA price level is a hypothetical measure of overall prices for some set of goods and services, in a given region during a given interval, normalized relative to some base set...
. - 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 trendMarket trendsA market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...
. - As soon as it appears, it indicates that an extreme change in the sentimentSentimentSentiment can refer to activity of five material senses mistaking them as transcendental:*Feelings and emotions...
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".