Characteristics of the Island Reversal Pattern
The Island Reversal is a rare pattern observed in financial markets, characterized by a distinct
trading range that is isolated from preceding price movements. This isolation is typically caused by
an Exhaustion Gap, followed by a Breakaway Gap in the opposite direction.
Formation: Upon close examination, the Island Reversal comprises an Exhaustion Gap followed by a
subsequent Breakaway Gap. Occasionally, the Breakaway Gap that completes the Island is retraced
within a few days due to market reactions. This pattern can occur at the peak or reversal points of
Head and Shoulders formations.
Characteristics:
- The Island Reversal is uncommon and minor in scale.
- It is not inherently significant on its own.
- It can occur at market tops as well as bottoms.
- Gaps at both ends typically occur around the same price level.
- The trading activity within the pattern is compact and isolated from surrounding moves.
- It serves as a strong indicator of a reversal in the primary or intermediate trend.
- Its appearance signals a notable shift in market sentiment.
- High trading volume is usually seen within the compact trading area.
- The trading activity within this pattern may last for only one or a few days. When this occurs over a single day, it is referred to as a One Day Reversal.