In bothstock trading andfinancialtechnical analysis, anisland reversal is acandlestick pattern with compact trading activity within a range of prices, separated from the move preceding it.[1] A "candlestick pattern" is a movement in prices shown graphically on acandlestick chart. This separation shown on the chart, is said to be caused by anexhaustion gap and the subsequent move in the opposite direction occurs as a result of abreakaway gap.[citation needed]
Close scrutiny of island reversal formations shows that the island reversal consists of anexhaustion gap and the subsequent move is followed by abreakaway gap. Uncommonly, the breakaway gap that completes the island is filled in a few days by a pull back as a result of the reaction. The island reversal can occur also, inversely, at the peak or the reverse ofhead and shoulders formations.
For example, assume that the price in a rising trend closes at its high of $84.00 and opens at $86.00 the following day and then does not fall below its opening. At the end of the day, it moves up further and touches $88.00, but closes at $87.60. Observation thus shows a gap of $2.00 which is not filled. On the following day, the market price opened at $87.40, touched a high of $88.90, and closed at $87.00. A few days later, or the very next day, the market price opens at $84.00 and closes at $82.90, keeping itself below the area of $86.00 and $84.00. All the trading above $86.00 will appear on the technical analysis chart to be isolated and is known as an "island reversal."
An example of a bearish island reversal pattern was identified by Kenneth Gruneisen and published via CANSLIM.net when ITT Educational Services (ESI) topped in January 2009. ESI fell from $120 to $12 in the 4 years that followed.[2]