Leaving the Island

An Island Top, one of the most reliable patterns, occurs when a upward trending price "gaps" above a specific price range and then is confirmed when the price "gaps" down below to the original range. That “island” that is created can be made up from one day or a cluster of days (formed by several bars rather than one) which is a much more powerful signal. The island cluster would look something like this example:

best independent investment advisor cfp retirement planner - island top example 9-12-16

With that in mind, below is the chart of the 20-year Treasury bond ETF, TLT. As you can see, TLT was in a confirmed uptrend and gapped up on June 27 and spent the next 58 trading days above the gap (encompassed within the red box). Last Friday, Sept 9, you can see price gapped below the box and through the up gap of June 27, creating an island.

best pleasanton investment advisor & retirement planning, cfp 9-12-16 TLT

Island tops have an historical success rate of 77% with an average decline from the successful formations of -21%. While nothing is guaranteed, this pattern's high probability outcome if validated with follow through in the next few days, the market’s concomitant rise in volatility and poor seasonality is a warning that bond holders are likely in for some near term pain