Technical analysis has a reputation for being complicated and time consuming, but there are many quick techniques that can provide an easy starting point for further research. While single-day patterns should not be relied on exclusively, they can be extremely useful as an on-the-spot analysis to identify potential market turning points. This article will introduce three single-day technical patterns and show how they can be effectively used in everyday trading.

Filling the Void with Gaps

Gap days occur when a day's low is above the previous day's high or a day's high is below the previous day's low, thereby creating a gap in the y-axis of the chart. These chart patterns occur as the result of unexpected news and can be used to identify changes in investor sentiment as well as gauge the strength of new, longer-term trends.

Since gaps most often occur as a result of unexpected news relating to a given security, such as earnings guidance, new products, regulatory approvals, acquisitions or scandals, they are far more common among individual stocks than indexes. However, gaps can also come as a result of strong changes in overall sentiment, marked by a cluster of buy orders at a higher or lower price.

There are four common types of gaps: common gaps, breakaway gaps, runaway gaps and exhaustion gaps. The most important ones for our purposes are breakaway gaps and runaway gaps, which provide reliable indicators that can be used to profit. The first can be best used if anticipated beforehand, while the latter can provide an excellent signal of future trends. (To learn more about gaps, check out our Analyzing Chart Patterns Tutorial.)

Anticipating breakaway gaps is easiest when there is a clear technical pattern and a strong trend that can be reversed. Buy or sell orders can then be placed either slightly above or below the breakout level, inside or outside of the trading range. Meanwhile, traders can buy into runaway gaps, as they often signal an intensifying trend going forward.

Here are two examples to illustrate these ideas in's 2007 history:

Figure 1: The breakaway gap follows the smaller breakout from the original trend.
Figure 2: The runaway gap, in the direction of the previous trend, predicted a continuation.

All in all, gaps can provide traders with many opportunities to profit either before or after the move. Breakaway gaps can signal profits for traders that put in limit orders around breakout levels, while runaway gaps can help investors identify strengthening trends.

Finding Turning Points with Island Reversals

Island reversals are single price bars, or groups of bars, sitting at the top of a price move and isolated by a gap on both sides, before and after the island pattern. When accompanied by high volatility and volume, this pattern can provide a reliable indicator of a major turning point, and therefore should be watched closely by any traders.

It is important to note that island reversals may not immediately signal a reversal of the trend, but they are often precursors to a big change in sentiment. In fact, a stock's price may even retest an island reversal's high before a turnaround takes effect. It can also be very helpful to look at the associated candlestick patterns - notably the doji star or engulfings - which can provide further insights into the price movements. (For more on patterns like the doji, see Day Trading Strategies For Beginners.)

Here is another chart showing an island reversal in Amazon's chart, where the stock reached over $100 per share before dropping sharply to approximately $80 per share after the pattern.

Figure 3: The island reversal predicted a dramatic change in the prevailing trend.

Interpreting Wide-Ranging and Inside Days

Wide ranging days and outside days are long bars that are often caused by a price shock, unexpected news or a breakout situation that caused increased volatility. Meanwhile, inside days take place when the high is lower than the previous day's highs and lows are above the previous day's low, representing a period of consolidation and lower volatility.

Wide ranging days are exactly what they sound like - days in which the price range is far beyond normal. Since extreme volatility isn't usually sustainable, wide-ranging days are often followed by some type of reversal or a pause in the market. The direction of the close - whether near the high or low - can often be a good indicator of continued direction.

Inside days often take place after the end of a price move, where prices have reached a point where buyers are already in and the price has moved too far to attract more buyers. Oftentimes, these inside days are followed by a change of direction, provided that no further news materializes to send the price higher.

Figure 4: The inside day marked consolidation before a significant run-up.

Final Considerations

Single-day patterns cannot often be used to profit on their own, unless traders use a lot of discretion when choosing the situations. After all, single-day patterns occur often by definition, and such a high frequency tends to make them less reliable and profitable than longer-term patterns, such as triangles or continuation patterns.

However, single-day patterns are excellent when used with other forms of technical analysis and can be used in some types of very specific situations. For example, in times of high volatility, being able to pick a more exact top can help in exiting or reversing a position for active traders. In this case, island reversals or inside days can prove extremely useful.

For more on technical analysis, see our Technical Analysis Tutorial and Blending Technical And Fundamental Analysis.

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  3. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  4. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  5. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  6. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  7. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  8. Technical Indicators

    Using Pivot Points For Predictions

    Learn one of the most common methods of finding support and resistance levels.
  9. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  10. Chart Advisor

    Watch These Stocks for Breakouts

    These four stocks are moving within price patterns of various size, shape and duration, and are worth watching for a breakout
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  3. Do interest rates increase during a recession?

    Interest rates rarely increase during a recession. Actually, the opposite tends to happen; as the economy contracts, interest ... Read Full Answer >>
  4. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  5. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  6. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center