How to judge the trend after the daily level island reversal gap is filled?

An island reversal gap on the daily chart signals potential trend exhaustion, especially in volatile crypto markets, and its confirmation relies on volume and follow-through price action.

Jun 23, 2025 at 07:42 am

Understanding the Daily Level Island Reversal Gap

An island reversal gap is a rare and significant technical pattern in price charts. It occurs when a gap forms between two trading sessions, creating an "island" of isolated price action. This pattern often signals a strong reversal in market sentiment. In cryptocurrency markets, where volatility is high, recognizing this formation can be critical for traders.

In daily-level charts, the island reversal appears as a gap up or down, followed by one or more sideways candles, then another gap in the opposite direction, isolating the middle section from the surrounding price movement. The relevance of this pattern lies in its potential to indicate trend exhaustion, especially after prolonged moves.

Identifying When the Gap Is Filled

Once an island reversal gap is formed, the next key event to watch is whether the gap gets filled. A gap fill happens when the price returns to the level it had before the gap occurred. In crypto charts, gaps are common due to the 24/7 nature of the market and frequent news-driven movements.

When analyzing if the gap has been filled, zoom into the daily chart and look for any candle that completely closes within the range of the gap. This means that all the price levels skipped during the initial gap have now been revisited. The act of filling the gap does not automatically confirm a reversal continuation; it only suggests that the market is digesting prior moves.

Evaluating Market Structure Post-Fill

After the gap is filled, it’s crucial to assess the broader context. Traders should examine the price structure around the fill—was it a consolidation phase, or did the price break below or above a major support/resistance zone? This helps determine whether the fill was part of a larger correction or a complete trend reversal.

Volume analysis becomes essential at this stage. If the gap fill occurred on higher-than-average volume, it might suggest stronger institutional participation or a shift in sentiment. Conversely, low-volume fills may indicate lackluster interest and could be less reliable.

Additionally, pay attention to how price reacts after touching the gap area. Does it bounce back in the original direction, or does it continue moving away? These behaviors help distinguish between temporary retracements and actual reversals.

Integrating Technical Indicators for Confirmation

Using technical indicators can enhance decision-making after an island reversal gap is filled. Moving averages such as the 50-day and 200-day EMA (Exponential Moving Average) can help identify the dominant trend. If the price remains below these key levels post-fill, it may signal continued bearish momentum.

The Relative Strength Index (RSI) and MACD (Moving Average Convergence Divergence) also play a role in confirming the strength behind the move. For example, if RSI shows divergence—where the price makes a new high but RSI fails to do so—it may reinforce the idea of weakening momentum after the gap fill.

Moreover, support and resistance zones derived from Fibonacci retracement levels can offer insights into potential turning points. If the price finds support near the 61.8% retracement after filling the gap, it might hint at a resumption of the prior trend.

Applying Price Action Strategies After the Fill

Price action analysis becomes particularly useful in assessing how the market behaves once the gap is filled. Look for key candlestick patterns such as engulfing candles, harami formations, or pin bars that form near the filled gap area. These patterns can provide early signs of bullish or bearish intent.

For instance, a bullish engulfing candle forming just after a gap fill in a downtrend might indicate that buyers are stepping in aggressively. Similarly, a sharp rejection candle at a previous swing high after a gap fill in an uptrend could suggest that sellers are gaining control.

Traders can also apply trendline breaks and channel dynamics to filter false signals. If the price breaks a rising trendline decisively after filling a bullish island gap, it strengthens the case for a trend change.

Frequently Asked Questions

What time frame is most suitable for identifying an island reversal gap?

While island reversals can appear on various time frames, they are most reliable on the daily chart due to reduced noise and clearer pattern formation. Lower time frames like the 1-hour or 4-hour may show similar gaps, but they are often subject to rapid reversals and false signals.

Can multiple island reversal gaps occur in a single trend?

Yes, though rare, multiple island reversals can occur, especially in highly volatile assets like cryptocurrencies. Each occurrence should be analyzed independently, with attention paid to the surrounding market structure and volume behavior.

Is there a difference between a regular gap and an island reversal gap?

Absolutely. Regular gaps—like common gaps or runaway gaps—are usually part of ongoing trends and get filled quickly. An island reversal gap, however, stands out because it’s isolated by two opposing gaps and often precedes a significant trend change.

How accurate is the island reversal pattern in predicting trend changes?

No pattern is 100% accurate, but island reversals have historically shown high reliability, especially when confirmed by volume and follow-through price action. In crypto, where emotions drive large moves, this pattern can be particularly insightful when used alongside other technical tools.