Island reversal is a technical analysis tool used in day trading, stock trading, futures trading, and options trading. There are two types of Island Reversals.
- Island Top Reversal - Stock gaps up, stock consolidation (creating the "island), stock gaps down. This is a bearish formation indicating an uptrend reversal.
- Island Bottom Reversal - Stock gaps down, stock consolidation (creating the "island), stock gaps up. This is a bullish formation indicating a downtrend reversal.
Take a look at an Island Top Reversal example in QCOM:
As you can see there is an uptrend in tact which is followed by a bullish gap, consolidation, then a gap down. The island is the consolidation area. It is called an "island because there is no price action attached to the consolidation period as a result of the gaps.
Here's a close up of this same Island Top Reversal. The gap up is the purple oval, the gap down is the blue oval.
Related terms: Gap Fill, Bullish Gap, Bearish Gap, Uptrend, Downtrend