What is the island reversal?

The island reversal pattern is a candlestick pattern that can mark the short term reversal of a stock. There are two different patterns the bullish reversal and the bearish reversal.

The pattern can consist of any number of candlesticks but must have at least 3. The first candlestick occurs in the same direction as the previous trend. We will use the example below which is a bullish reversal.

In this example the first day is a bearish day. The second day gaps down even lower at the open and stays lower. The price of the stock may continue below this gap for any number of days while the stock decides what it wants to do.

The last day of the pattern the prices jump back up over the gap. This indicates that the stock has decided to move up and is a good buy signal.

Below is an example of how a bullish island reversal pattern looks like. A bearish reversal would look exactly the same only reversed.