Stand Alone Formation Speaks VolumesReversals tend to occur slowly, with securities forming double bottoms, higher lows, head and shoulders patterns, etc. before starting a new trend. However, sometimes we see a dramatic reversal immediately, and one of the best indications of these types of reversals is Island Tops and Bottoms. An island top or bottom is formed when price gaps in the direction of the current trend, and then it gaps the opposite direction in the next day or so. One look at this formation tells us where the name island comes from - they are isolated from the previous and current trend by the gaps. Regardless of the market factors that created this rare formation, they are usually fair warning of a dramatic reversal. AOC shows a good example of an Island Top. Many people tend to think of islands as only one bar, but this will cause you to miss opportunities by ignoring the fact that Island Reversal Formations can take a few bars to fulfil their promise. ATML gives us another example of an Island Top. As with almost any chart pattern, it is best to wait for a confirmation move after the initial setup. This chart is a good example that there is still plenty of "meat on the bone" after waiting for a confirmation move. Island Tops and Bottoms are reliant upon gaps,
and an exhaustion gap and breakaway gap are components of this
chart pattern. So Island Reversals actually give us two
confirming chart patterns. Once the trend line is broken after
the reversal, we are looking at a prime trade candidate. |
Aon Corp formed an Island Top in mid-April
Big percentage drop for ATML after an Island Top
Comverse Technology is yet to recover after the Island
Top
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