Global Market Astro has been explaining the types of gaps observed in the chart patterns used in stock market trend analysis. In this blog we brief about the Island reversal, a type of gap chart pattern.
Island reversal is a commonly observed chart pattern which is formed by a gap followed by a flat trading and then confirmed by another gap in the opposite direction. It is a strong signal of a top or bottom in a trend indicating an upcoming shift in the trend.
The above is an example of island reversal which occurs at the end of a downtrend. It’s formed when an exhaustion gap appears in a downtrend followed by a flat trading period. The pattern is confirmed when an upward breakaway gap is formed 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 previous trend. If it happens near the commencement of a trend, then the size of the reversal will likely be less significant.