Island Reversal
An island reversal is identified by gaps between the signal day and the days on either side. This is a strong short-term signal.
After an up-trend:
- The day's Low is above the High of the day before and the day after.
After a down-trend:
- The day's High is below the Low of the day before and the day after.
Island Clusters
Even stronger signals are island cluster reversals where an island is formed by several bars rather than one.
Remember:
The signals are most reliable if they occur after a strong trend. If the trend is weak, so is the signal.
Author: Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.