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Island Reversal Pattern - Educational Example
Tuesday, January 27, 2009 / CANSLIM.net
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One of the advanced technical chart patterns investors might want to be familiar with is called an "island reversal" pattern.  An island reversal can be either a bearish or bullish pattern depending on the circumstances.  A bullish island reversal might occur when a stock first gaps down, but then subsequently gaps back up again several days or weeks later - leaving an "island" of trading activity away from an otherwise continuous stretch of trading in a mostly orderly price range. In today's example below, we are taking a look at a bearish island reversal which recently raised a caution flag for investors.

ITT Educational Services (ESI +$2.34 or +2.00% to $119.36) has been a strong leader that managed to make impressive progress above its latest pivot point and max buy levels, getting extended from a sound price base.  However, its recent action has been indicative of distributional pressure, as it gapped down on 1/26/09, completing a small "island reversal" pattern.  In this case, the gap down negated its prior 1/22/09 gap up, which may be more easily spotted by looking at an hourly chart as compared to the annotated daily graph below.  Chart readers with an eye for details may consider it more than a coincidental circumstance that it happened to stall within one dollar of its 2007 all-time high of $131 per share. This stock was first featured in the December 2008 CANSLIM.net News (read here).  Prior chart highs near its latest pivot point are now an important level to watch for support, while deterioration into its prior base would raise more serious concerns.

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