What it means
An island reversal forms when price gaps in one direction (typically up after an uptrend), trades sideways for 1-10 sessions forming an 'island,' then gaps in the opposite direction (down) to leave the island visually stranded. The combination of entry and exit gaps signals sharp sentiment reversal. Very rare — Bulkowski reports island reversals occur once every 2-3 years per stock on average.
Why it matters
Island reversals signal abrupt regime change. The first gap is typically continuation; the second gap signals capitulation in the new direction. The island period in between is where positions trapped from the first gap get marked-to-market and forced out. High-reliability pattern (~75% follow-through per Bulkowski) but rare.
How to use it
Confirmation = the second gap closing on the day. Wait for the day after the exit gap to confirm — gap-fade strategies sometimes close the gap in the same session, negating the pattern. Trade in the direction of the exit gap. Target = the move that PRECEDED the entry gap (full retrace of prior trend).
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