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Thomas Bulkowski’s successful investment activities allowed him to retire at age 36. He is an internationally known author and trader with 30+ years of stock market experience and widely regarded as a leading expert on chart patterns. He may be reached at

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Bulkowski's Island Reversals

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Busted
Patterns
Candles Chart
Patterns
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Patterns
Small Patterns
Market
Industrials (^DJI):
Transports (^DJT):
Utilities (^DJU):
Nasdaq (^IXIC):
S&P500 (^GSPC):
As of 05/26/2017
21,080 -2.67 0.0%
9,176 12.36 0.1%
720 -0.08 0.0%
6,210 4.93 0.1%
2,416 0.75 0.0%
YTD
6.7%
1.5%
9.2%
15.4%
7.9%
Tom's Targets    Overview: 05/15/2017
21,400 or 20,450 by 06/01/2017
9,500 or 8,700 by 06/01/2017
730 or 700 by 06/15/2017
6,350 or 6,000 by 06/01/2017
2,450 or 2,375 by 06/15/2017

Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information.

For more information on this pattern, read Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book., pictured on the right, pages 464 to 479. That chapter gives a complete review of the chart pattern, including tour, identification guidelines, focus on failures, performance statistics, trading tactics, and sample trade. Below is just a sliver of the information contained in the book.

In a bull market, island reversals are the worst performing chart pattern. The break even failure rate is high for a chart pattern and the average rise or decline is mediocre.

Island reversal chart pattern
Island Reversal Chart Pattern

 

Important Bull Market Results for Island Reversals

Overall performance rank for up/down breakouts (1 is best): 23 out of 23; 21 out of 21
Break even failure rate for up/down breakouts: 18%; 17%
Average rise/decline: 23%; 17%
Throwback/pullback rate: 70%; 65%
Percentage meeting price target for up/down breakouts: 69%; 62%

The above picture shows an island top reversal. The horizontal arrows point to gaps that align at the same price.

The above numbers are based on hundreds of perfect trades. See the glossary for definitions.

Island Reversal Identification Guidelines

CharacteristicDiscussion
Price trendTops have price trending upward to the island; bottoms have price trending downward.
ShapeGaps separate a price island from the mainland.
GapsTwo gaps must share some or all of the same price.
VolumeHigh on the day price makes the second gap.
DurationThe island can be one day to several months long.
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Island Reversal Trading Tips

Trading TacticExplanation
PerformanceIn case you missed it, this pattern has the worst performance rank of any chart pattern – dead last – regardless of the breakout direction.
Measure ruleCompute the height from the highest peak (A in the Measure Rule figure to the right) to the lowest valley in the island (B) and then multiply it by the above “percentage meeting price target.” Add the result to the price of the highest peak (A, upward breakouts) or subtract it from the lowest valley (B, downward breakouts). The result is the target price, C, shown only for downward breakouts.
HeightTall islands perform better than short ones.
Height, widthIslands both tall and narrow perform especially well for both breakout directions.
Volume shapeIslands with upward breakouts and U-shaped volume perform well as do those with downward breakouts and a random volume shape (neither U nor dome shaped).
Throwbacks and pullbacksThrowbacks and pullbacks hurt post breakout performance. Since throwbacks and pullbacks happen so frequently, you can wait for them to complete before taking a position.
Island measure rule
The Measure Rule
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Island reversal chart pattern example

Island Reversal Example

The figure shows an example of an island bottom reversal chart pattern. Price enters the island at A by gapping lower and another gap sharing the same price appears at B. The two gaps form the island bottom.

You can see why islands do not work well. This one shows price moving up at B and then reversing, throwing back to the breakout price and continuing lower, ending well below the bottom of the island.

-- Thomas Bulkowski

 

 

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Written by and copyright © 2005-2017 by Thomas N. Bulkowski. All rights reserved. Disclaimer: You alone are responsible for your investment decisions. See Privacy/Disclaimer for more information. Error: Keyboard not attached. Press F1 to continue.