Bulkowski’s Island Reversals

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In a bull market, island reversals are the worst performing chart pattern. The break even failure rate is high for a chart pattern and the average rise or decline is mediocre. For more information see pages 464 to 479 of the book Encyclopedia of Chart Patterns, Second Edition and the following...

Important Results

Identification Guidelines

Trading Tips

Example

Island reversal chart pattern

Important Bull Market Results

Overall performance rank for up/down breakouts (1 is best): 23 out of 23; 21 out of 21

Break even failure rate for up/down breakouts: 18%; 17%

Average rise/decline: 23%; 17%

Throwback/pullback rate: 70%; 65%

Percentage meeting price target for up/down breakouts: 69%; 62%

The above picture shows an island top reversal. The horizontal arrows point to gaps that align at the same price.

Identification Guidelines

Characteristic	Discussion
Price trend	Tops have price trending upward to the island; bottoms have price trending downward.
Shape	Gaps separate a price island from the mainland.
Gaps	Two gaps must share some or all of the same price.
Volume	High on the day price makes the second gap.
Duration	The island can be one day to several months long.

Trading Tips

Trading Tactic	Explanation
Performance	In case you missed it, this pattern has the worst performance rank of any chart pattern – dead last – regardless of the breakout direction.
Measure rule	Compute the height from the highest peak (A in the Measure Rule figure to the right) to the lowest valley in the island (B) and then multiply it by the above “percentage meeting price target.” Add the result to the price of the highest peak (A, upward breakouts) or subtract it from the lowest valley (B, downward breakouts). The result is the target price, C, shown only for downward breakouts.
Height	Tall islands perform better than short ones.
Height, width	Islands both tall and narrow perform especially well for both breakout directions.
Volume shape	Islands with upward breakouts and U-shaped volume perform well as do those with downward breakouts and a random volume shape (neither U nor dome shaped).
Throwbacks and pullbacks	Throwbacks and pullbacks hurt postbreakout performance. Since throwbacks and pullbacks happen so frequently, you can wait for them to complete before taking a position.

The Measure Rule

Example

Island reversal chart pattern example

The above figure shows an example of an island bottom reversal chart pattern. Price enters the island at A by gapping lower and another gap sharing the same price appears at B. The two gaps form the island bottom.

You can see why islands do not work well. This one shows price moving up at B and then reversing, throwing back to the breakout price and continuing lower, ending well below the bottom of the island.


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