Island Reversal Pattern

Island Reversals are part of price gap structures, and form when prices are isolated by gaps on both sides of the price rally or price decline. In an extended rally, price rallies above the prior sessions close and form an upside gap. After few sessions, a downside gap is formed to close below the prior sessions close. This isolation of price-range forms an Island Reversal setup, which usually signals much larger technical declines in bullish trends, or rallies in bearish trends.

Most Island reversals are usually news driven events. Volume should be at higher levels on both sides of the gaps. It is very rare to see an Island Reversal pattern in the middle of a rally as they reverse the prior trends after the second gap.

Trade:

After a reversal, enter a "short" trade (for uptrend) below the low of the second down gap. Or, enter a "long" trade (in a down trend) above the high of the second gap up.

Stop:

Place a "stop" order if the market closes above the high of the "Island Reversal" pattern for shorts, or if it closes below the low of the Island Reversal pattern for longs.

Target: Island Reversals usually are very profitable as they signal a weakness in the current trend. Targets are placed near key event driven support or resistance levels.

5/7/0710:31PM

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5/7/0710:43PM

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