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Island reversal patters are powerful indicators in many markets. The notion that a gap in the markets price action is a guide to strength or weakness in a particular trend is well held by many technical analysts. The current price action of the SPI 200 shows a number of interesting points that have held well to the established rule that an island pattern can be a string reversal pattern.
A trader just needs to look at the 2003 bear market low of 2003 at 2679 where the market formed the base from which the SPI more than doubled in value in just under five years. The recent lows in the market in 2009 were in March and a strong rally has kicked off but at the time of writing there is a wave of concern that the run out is about to come to an end.
If we look at two charts one of the 2003 low and the second of the 2009 low we will see a similar pattern formed followed by a strong run out.
Chart 1 – Daily Bar Chart SPI200
click chart to enlarge
Chart 2 – Daily Bar Chart SPI200
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As these island reversal patters on the SPI 200 are few and far between we can place a larger weight in their significance to the moves that are at hand. For those reason and many more we may just be seeing a logical pause in the rally that is underway. The market has been up for many weeks and we know that when we have an exponential move its is not always sustainable.
To assist in making sure we are evaluating the information at hand, at the time of writing we are at a balance point where the market could move further lower of find some strength and move higher. Once again there is a potential island pattern that could act as a guide.
In chart 3 we see the current market action and the potential for another island reversal low to form and thus commence a move higher. For this to be confirmed as an Island reversal pattern we need to see a market gap out to the upside and form the island pattern.
Chart 3 – Daily Bar Chart SPI200
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Combine this potential pattern with the anniversary of a major turn on May 19th last year and we may have enough of a catalyst to see higher prices into the middle of the year. Like all patterns and signals we need to wait for confirmation combined with a trading plan and system to maximize the potential for profits. I know it’s time to be on red alert for the subtleties signs the markets gives us, as demonstrated by many of the attendees at the most recent Hot Commodities Summit there is plenty of chances for profits its case of having the knowledge and plan to take action.
Good Trading
Aaron Lynch
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