Single-Day Island Reversal Top

A single day island reversal top usually occurs during an uptrend. Prices gap up from the uptrend and form a larger ranged (high price – low price) price bar. The price bar becomes a single day island reversal when prices gap down the next day. The expectation is that prices will consequently move downward after this island reversal top pattern.

Single-Day Island Reversal Bottom

In contrast, a single day island reversal bottom occurs during a downtrend. Prices gap down from the downtrend and form a usually large ranged price bar. The pattern is complete when prices gap up the next day leaving an isolated price bar at the bottom of a downtrend. The expected outcome after the gap up and close higher is that prices will continue moving upward. Rockefeller (2011) states that the volume on the single day island reversal price bar is typically low and that the volume on the price bar that gapped after the island bar is usually high (p. 127). These single day island reversal price bars stand out on charts because there is no price action on the left or right and should be occurring at the top and bottom of trends.

Single-Day Island Reversal Top Chart Example

The chart above of the 20+ Year Treasury Bond ETF (TLT) illustrates a single-day island reversal top. The overall trend prior to the pattern was a downtrend, but the immediate trend prior to the island reversal was an uptrend. Prices rose prior to the pattern and then gapped up. Prices hit the overhead resistance established by the larger scale downtrend and then fell and closed near the low of the day. The pattern was completed with a large gap down. Prices then fell even further until they hit the downtrend's support line. Overall, the island reversal pattern combined with the downtrend channel would have made for a great trade.

Single-Day Island Reversal Bottom Chart Example

The chart above of British Petroleum (BP) illustrates a single-day island reversal bottom signaling the end of a downtrend and the beginning of a new uptrend. The pattern is preceded by a downtrend, prices gap down. The island reversal price bar has a large range (high price – low price) and closes the day very close to the high which is suggestive of the direction of the next day's price range. The next day is a gap up which completes the pattern.

Multi-Day Island Reversal Top Pattern

Multi-day Island Reversals are groups of price bars that are separated by a gap up and then gap down (in the case of an island reversal top) or separated by a gap down and then a gap up (in the case of an island reversal bottom).

Multi-Day Island Reversal Bottom Pattern

In either case, the gap up/gap down on the left side of the pattern should share gap price levels (prices where no trading occurred) with the gap up/gap down on the right side of the pattern (i.e. a traders should be able to draw a rectangle from the gap on the left to the gap on the right where no prices transacted on the chart.

Price Targets

Bulkowski (2008) offers the following price target formulas for the island reversal pattern:

Performance and Traits of Multi-Day Island Reversal Pattern

It is important to point out that Bulkowski (2005) in his chart research points out that the island reversal pattern is the worst performing pattern of the patterns he ranked, this is because of the high failure rate, the high pullback rate, and the mediocre gain/decline after buy/sell signal is given. That being said, the traits of the island reversal that increase its effectiveness, according to Bulkowski (2005) are:

• Tall patterns perform better than short ones
• Skinnier and tall patterns perform the best

The long island which is an island continuation pattern performs much better.

Multi-Day Island Reversal Top Chart Example

The chart of the 20+ Year Treasury Bond ETF (TLT) illustrates an uptrend that is crowned with an island reversal top pattern. Prices gap up beyond the highs of the previous uptrend. The price action then proceeds to create a mini head and shoulders pattern. Prices gap down, then prices have a three day retracement filling the gap and then proceed to fall and gap down multiple times.

Multi-Day Island Reversal Bottom Chart Example

The chart above of Intel Corp (INTC) shows an island reversal bottom. The pattern is preceded by a downtrend even though the more long-term trend was upward. Prices gap down, prices get very close to filling the gap and then fall further. An inverted head and shoulders pattern was almost complete before a gap up to the price level where the prior gap down price level began.

Works Referenced

1. Kirkpatrick II, C.D., & Dahlquist, J.R. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians (2nd ed.). Upper Saddle River, NJ: FT Press.
2. Rockefeller, B. (2011). Technical Analysis For Dummies (2nd ed.). Hoboken: John Wiley & Sons.
3. The Pattern Site. (2008). Bulkowski's Measure Rule. Retrieved June 1, 2012, from http://thepatternsite.com/measure.html
4. The Pattern Site. (2005). Bulkowski's Island Reversals . Retrieved June 1, 2012, from http://thepatternsite.com/islandrev.html