Island Reversals
Stand Alone Formation Speaks Volumes
Reversals tend to occur slowly, with securities forming double bottoms,
higher lows, head and shoulders patterns, etc. before starting a new trend.
However, sometimes we see a dramatic reversal immediately, and one of the
best indications of these types of reversals is Island Tops and Bottoms.
An island top or bottom
is formed when price gaps in the direction of the current trend, and then it
gaps the opposite direction in the next day or so. One look at this formation
tells us where the name island comes from - they are isolated from the
previous and current trend by the gaps. Regardless of the market factors that
created this rare formation, they are usually fair warning of a dramatic
reversal.
AOC shows a good example
of an Island Top. Many people tend to think of islands as only one bar, but
this will cause you to miss opportunities by ignoring the fact that Island
Reversal Formations can take a few bars to fulfill their promise.
ATML gives us another
example of an Island Top. As with almost any chart pattern, it is best to
wait for a confirmation move after the initial setup. This chart is a good
example that there is still plenty of "meat on the bone" after
waiting for a confirmation move.
Island Tops and Bottoms
are reliant upon gaps, and an exhaustion gap and breakaway gap are components
of this chart pattern. So Island Reversals actually give us two confirming
chart patterns. Once the trendline is broken after the reversal, we are
looking at a prime trade candidate.
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Aon Corp formed an
Island Top in mid-April
Big percentage drop
for ATML after an Island Top
Comverse Technology
is yet to recover after the Island Top
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