The Analyst - WinStock Software

Analyst: Island Reversal Pattern

Island reversals are isolated data points separated by gaps. After an extended rally the stock "gaps" higher, that is, it proceeds to open outside of the most recent trading range. After trading in the new higher range for several sessions, a second gap occurs only this time the move is lower.

Island reversals usually occur at the start of larger technical patterns and as such, technical targets are not implied but these patterns usually lead to much lower prices.

  • Island reversals are news driven and usually occur because conflicting news events occur within short time frames.
  • Volume should accelerate on both the initial breakout and the subsequent failure for island reversal.
  • Island reversals are "trend killers" and usually lead to the formation of large patterns that follow the trend.

After an extended rally the stock opens well above the most recent trading range following news. This break out from the previous consolidation pattern occurs on huge volume and appears legitimate but after several days the stock fails to move significantly higher. New buyers become anxious, sellers should have been removed with the most recent move through resistance, something is wrong. Days later there is fundamental news that contradicts the news that initiated the breakout and already anxious new buyers panic, the stock opens lower. Weeks later the stock is well off the recent highs.

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