Concept

Island reversal

Summary

In both stock trading and financial technical analysis, an island reversal is a candlestick pattern with compact trading activity within a range of prices, separated from the move preceding it. A "candlestick pattern" is a movement in prices shown graphically on a candlestick chart. This separation shown on the chart, is said to be caused by an exhaustion gap and the subsequent move in the opposite direction occurs as a result of a breakaway gap. 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 also, inversely, at the peak or the reverse of head and shoulders formations.reseversals 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. At the end of the day, it moves up further and touches

88.00, but closes at

87.60. Observation thus shows a gap of

2.00 which is not filled. On the following day, the market price opened at

87.40, touched a high of

88.90, and closed at

87.00. A few days later, or the very next day, the 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." An example of a bearish island reversal pattern was identified by Kenneth Gruneisen and published via CANSLIM.net when ITT Educational Services (ESI) topped in January 2009. ESI fell from

120 to $12 in the 4 years that followed. 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.

Official source

https://en.wikipedia.org/wiki/Island_reversal

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