Island Reversal One of the most well-known gap patterns is the
island reversal, which is formed by a gap followed by flat trading and then confirmed by another gap in the opposite direction. This pattern is a strong signal of a top or bottom in a trend, indicating a coming shift in the trend.
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Figure 6: Island reversal pattern |
Above is an example of an island-bottom reversal that occurs at the end of a downtrend. It's formed when an exhaustion gap appears in a downtrend followed by a period of flat trading. The pattern is confirmed when an upward breakaway gap forms in the price pattern.
The size of the trend reversal or the quality of the signal is dependent on the location of the island in the prior trend. If it happens near the beginning of a trend, then the size of the reversal will likely be less significant.
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