|Island reversals can occur after an extended rally and are normally found marking a top. They are characterized by gaps on either side of the formation: a gap up and finally a gap down.|
|Island reversals can be news driven and this fits with the drama of this week's rumour of a federal rate cut. Note the island reversal pattern here was a good tipoff that the initial response to the non-rate cut would be a sell-off as $USD fell ahead of the indices.|
|Graphic provided by: finance.lycos.com.|
|This pattern is not normally a bottom reversal pattern but in this case it did mark a short-term bottom reversal as the gaps show.|
Many patterns have opposite counterparts -- reverse head and shoulders and double/triple bottoms. So an island reversal from a bottom, though probably very rare should not be "unthinkable."
|Interestingly, the "bottom" island had its last gap closed before continuing in the original direction. Now we will have to see if this occurs again with this next formation.|
|Should this potentially bearish formation reverse and go on to beat the top of the island, this would then be a big bullish signal to traders. At the very least these island reversal groupings should serve as important support and resistance levels to watch down the road. If it continues down then look for a possible double bottom test of the 104 area.|
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