Island Reversal Pattern: Gaps That Strand Price

Key Takeaways

• An island reversal is a group of bars isolated by a gap on entry and an opposite gap on exit.
• An island top can end an uptrend, and an island bottom can end a downtrend.
• The two gaps must sit at roughly the same price for a true island to form.
• Bulkowski found island reversals rank among the weaker patterns for follow-through.

What It Is

An island reversal is created by two price gaps. First, price gaps in the direction of the existing trend, trades in a tight range for one or more sessions, then gaps back the opposite way. The bars between the two gaps are stranded, with empty space on both sides at the same price level.

There are two forms. An island top forms after an uptrend: price gaps up, consolidates, then gaps down, leaving an island at the high. An island bottom forms after a downtrend: price gaps down, consolidates, then gaps up, leaving an island at the low. Bulkowski's study of these patterns found they correctly predicted the next move only about 58% of the time, and they rank near the bottom of his pattern performance tables.

The Intuition

A gap shows a sudden imbalance, where buyers or sellers overwhelm the other side before trading can fill the space. An island reversal stacks two such shocks back to back in opposite directions.

The first gap looks like the trend accelerating. The consolidation is a pause. Then the second gap, in the opposite direction, reveals that the move was exhaustion rather than strength. The trapped traders who entered during the island now sit on losing positions, and their exits can feed the reversal. The pattern is essentially a failed breakout sealed shut by a second gap.

How the Island Reversal Pattern Works

The key requirement is that both gaps occur at roughly the same price, so the island is truly isolated with empty space on each side. The island itself can be a single bar or several bars of sideways trading.

For an island top, the exit gap is downward, and confirmation is the gap that closes the island below the entry gap. For an island bottom, the exit gap is upward. The exhaustion gap that ends the trend often comes on heavy volume. Because the pattern has no neat height-based projection like a double top, traders typically use the nearest support or resistance as a target rather than a fixed measured move.

Worked Example

A stock in an uptrend closes at $80, then gaps up to open at $84 the next morning. It trades between $84 and $86 for three sessions on heavy volume. Then it gaps down, opening at $80 and closing lower, leaving the bars between $84 and $86 stranded above two gaps.

The cluster from $84 to $86 is the island. Both the entry gap and the exit gap sit near $80 to $84, so the island is isolated. The downward exit gap signals an island top and a likely reversal of the uptrend. A trader treating this as bearish would watch the prior support levels below $80 as the next targets, while keeping in mind the pattern's modest historical reliability.

Common Mistakes

1. Confusing it with a single gap. One gap is just a gap. An island needs two gaps, in opposite directions, at roughly the same price. Without the second gap there is no island.

2. Trusting it too much. Bulkowski's data places island reversals near the bottom of his performance rankings, with only about 58% directional accuracy. Treat it as a clue, not a certainty.

3. Ignoring the gap alignment. If the two gaps are far apart in price, the bars are not truly isolated and the pattern is weaker or invalid.

4. Skipping volume. The exit gap that ends the trend is more convincing on heavy volume. A quiet second gap is easier to fill and reverse.

5. Forgetting gaps can fill. Gaps often get filled later. An island can be partly erased if price retraces into the gap, which can trap traders who acted on it without a stop.

Frequently Asked Questions

What is an island reversal pattern in simple terms? It is a small group of price bars cut off from the rest of the chart by a gap on each side. The isolated cluster can signal that the current trend is about to reverse.

How does an island reversal pattern affect investment decisions? Traders read an island top as a warning that an uptrend may be ending and an island bottom as a possible end to a downtrend. Because reliability is modest, many use it alongside support and resistance rather than alone.

What is a real-world example of an island reversal? A stock gaps up from $80 to $84, trades near $85 for a few days, then gaps back down to $80, stranding those bars. The downward gap marks an island top and a possible reversal lower.

How can investors avoid acting on weak island reversals? Confirm both gaps sit at roughly the same price, require heavy volume on the exit gap, and pair the signal with nearby support or resistance instead of relying on the pattern alone.

How is an island reversal different from a V-top reversal? An island reversal is defined by two gaps that strand a cluster of bars. A V-top is a sharp straight-line rise and fall with no required gaps. Both mark fast reversals, but the mechanics differ.

Sources

1. Bulkowski, Thomas. "Island Tops and Island Bottoms." ThePatternSite. https://www.thepatternsite.com/islandrev.html
2. Investopedia. "Island Reversal." https://www.investopedia.com/terms/i/islandreversal.asp
3. Bulkowski, Thomas. "Pattern Index." ThePatternSite. https://thepatternsite.com/chartpatterns.html
4. StockCharts ChartSchool. "Gaps and Gap Analysis." https://chartschool.stockcharts.com/table-of-contents/chart-analysis/gaps-and-gap-analysis

Disclaimer

This article is educational content only and is not financial advice. Nothing here is a recommendation to buy, sell, or hold any security. Consult a licensed advisor before making investment decisions.