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Written by and copyright © 2005-2008 by Thomas N. Bulkowski. All rights reserved.
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. For more information see pages 464 to 479
of the book Encyclopedia of Chart Patterns,
Second Edition and the following...
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 Island reversal chart pattern
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Important Bull Market Results
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.
Identification Guidelines
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Characteristic |
Discussion |
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Price trend |
Tops have price trending upward
to the island; bottoms have price trending downward. |
|
Shape |
Gaps separate a price island
from the mainland. |
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Gaps |
Two gaps must share some or
all of the same price. |
|
Volume |
High on the day price makes
the second gap. |
|
Duration |
The island can be one day
to several months long. |
Trading Tips
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Trading Tactic |
Explanation |
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Performance |
In case you missed it, this
pattern has the worst performance rank of any chart pattern – dead last – regardless of the breakout direction. |
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Measure rule |
Compute 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.
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Height |
Tall islands perform better than
short ones. |
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Height, width |
Islands both tall and narrow
perform
especially well for both breakout directions. |
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Volume shape |
Islands 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).
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Throwbacks and pullbacks |
Throwbacks and pullbacks hurt postbreakout
performance. Since throwbacks and pullbacks happen so frequently, you can wait for them to complete before taking a position. |
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 The Measure Rule
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Example
The above 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.
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