In both
stock trading In finance, a trade is an exchange of a security (stocks, bonds, commodities, currencies, derivatives or any valuable financial instrument) for "cash", typically a short-dated promise to pay in the currency of the country where the ' exchange' is ...
and
financial technical analysis
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the sam ...
, an island reversal is a
candlestick pattern In financial technical analysis, a candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are us ...
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
A candlestick chart (also called Japanese candlestick chart or K-line) is a style of financial chart used to describe price movements of a security, derivative, or currency.
It is similar to a bar chart in that each candlestick represents all f ...
. 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.
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 also, inversely, 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. 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.
CANSLIM.net
/ref>
Characteristics
* 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
Gaps is a member of the Montana group of Patience games, where the goal is to arrange all the cards in suit from Deuce (a Two card) to King.
Other solitaire games in this family include Spaces, Addiction, Vacancies, Clown Solitaire, Paganini, ...
at either end occur at almost the same price level
The general price level is a hypothetical measure of overall prices for some set of goods and services (the consumer basket), in an economy or monetary union during a given interval (generally one day), normalized relative to some base set ...
.
* It has 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 a primary or intermediate trend
A fad or trend is any form of collective behavior that develops within a culture, a generation or social group in which a group of people enthusiastically follow an impulse for a short period.
Fads are objects or behaviors that achieve shor ...
.
* As soon as it appears, it indicates that an extreme change in sentiment
Sentiment may refer to:
*Feelings, and emotions
*Public opinion, also called sentiment
*Sentimentality, an appeal to shallow, uncomplicated emotions at the expense of reason
*Sentimental novel, an 18th-century literary genre
*Market sentiment, opt ...
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".
References
{{technical analysis
Chart patterns