Island reversal

What it is

An island reversal forms when price gaps up, trades for one or more bars, then gaps back down, leaving that cluster stranded like an island above the rest of the chart. The first gap is often an exhaustion gap, and the trapped buyers on the island fuel the move down. An island bottom is the mirror.

It needs gaps, so it appears on stocks and on futures over the overnight break; on 24-hour forex charts it is rare.

How to spot it

• A gap into the cluster and a gap out of it, in opposite directions, with the gaps roughly at the same level.

How to use it

• Look for trades in the direction of the second gap, with the stop beyond the island.

Common mistakes

• Calling small overlaps 'gaps'.
• Expecting the gap below the island to fill quickly.

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