Thursday, February 2, 2017

An "island reversal" sell signal?

In response to my last post (see Watching the USD for clues to equity market direction), an alert reader pointed that the SPX had formed a bearish island reversal.

Wikipedia explained the island reversal formation this way:
In stock trading and technical analysis, an island reversal is a candlestick pattern with compact trading activity within a range of prices, separated from the move preceding it. This separation is said to be caused by an exhaustion gap and the subsequent move in the opposite direction occurs as a result of a breakaway gap.
I had grown up with trading aphorisms and folklore like this, so I decided to test out whether the island reversal formation had any trading information. The results were surprising, and it was another lesson in how asymmetric signals were at tops and bottoms (see The ways your trading model could be leading you astray).

The full post can be found at our new site here.

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