Cramer and Island Reversals

For some reason I had CNBC on this morning by mistake.  I no longer wtach CNBC as I cannot stand listening to Cramer in the morning, or anytime really.  I laughed out loud when I heard him say “Yeah, huge island reversal in Apple yesterday, not to get too technical…” or somehting like that.  Hmm.  Jim Cramer proves he has about as much technical prowess as a toad.  Here is what an island reversal looks like:

500px-The_island_reversal_new

Here is what Apples trade yesterday looked like:

AAPL_2012.02.15

Do you see an island reversal there?  No?  No.  You see a reversal.  Maybe a “key” reversal.  Certainly an outside daily reversal.  If AAPL drops another $40+ you could have a weekly reversal.  But not an Island Reversal.   Now it did gap higher in late January right after its blowout earnings.  So there actually is a chance of a Giant Island Reversal, something analogous to the size of, say, Australia.  Whereas most are analogous to the size of, say, Big Island in Lake Minnetonka (for those familiar with the Twin Cities) or maybe Ellis Island in New York, possibly even Long Island. But to do that, the price would have to drop to something around $440 and then open up the following day at $430 or below and not trade in the space between $430 and $440 again.

There are very few Island Reversals these days because markets are essentially open around the clock and most trading is now done electronically.  The days of the island reversal were the days of the pit trade, where the market was open a limited number of hours and the state of the world could change overnight, leading to substantial price dislocation on the next opening session. Stocks are actually one of the only places you can see Island Reversals these days as most trade only during NYSE hours between 9:30AM and 4PM Eastern.  I am not sure why this bothered me enough to actually take the time to write about it, but I suppose I am annoyed that a person who holds themselves out as an expert could say something so foolish and wrong.  It reflects poorly on him and on CNBC as well.  I suppose that is why I have Bloomberg on all day instead now.

One Response to “Cramer and Island Reversals”

  1. Bob Heeter Says:

    Tom, if I find you paying attention to Cramer again, I will take you out to the woodshed!

    The man is an entertainer, nothing more.

    BTW, I have a fondness for Island reversals (and for the general premise that gaps long to be filled). One of my very first trades was BTU in 2006, and I spotted an island reversal which cued me to exit at the right time. That and some other negative action got me out before the spring correction that year, too. The chart now doesn’t show it the way it looked on the “day after”, alas, but it was there:

    http://bigcharts.marketwatch.com/advchart/frames/frames.asp?show=&insttype=Stock&symb=btu&x=38&y=15&time=100&startdate=1%2F1%2F2006&enddate=6%2F1%2F2006&freq=1&compidx=aaaaa%3A0&comptemptext=&comp=none&ma=4&maval=10%252C26%252C52&uf=8&lf=268435456&lf2=4&lf3=2&type=128&style=320&size=3&timeFrameToggle=false&compareToToggle=false&indicatorsToggle=false&chartStyleToggle=false&state=11

    I expect all the Apple blowoff exhaustion gaps will be filled by year-end, if not much sooner…