Whenever we see price gapping up or down, as happened with META in February, we prepare for the possibility of an island reversal. After the gap up, price forms a cluster, the island, and we ponder the possibility of a gap down to complete the reversal. During the formation of META’s island news coverage was very positive, but yesterday’s earnings report made investors unhappy, and META really took a dive, jumping down across the gap.
While some might have been surprised by the final resolution, the chart gave ample clues, as there were negative divergences on both the PMO (price) and OBV (volume).
There was also a PMO negative divergence on the weekly chart.
Island reversals can happen to the downside as well as the upside.
However, we have two more island formations to monitor in the intermediate term. Neither appears that dangerous as the clues we had on META are not visible on Amazon (AMZN) and NVIDIA (NVDA).
AMZN shows a large island formation, but we do note we saw a gap down yesterday. That turned into its own reverse island only to the upside. The PMO has since begun to turn up on today’s rally. There is no OBV negative divergence. We would just be careful with earnings being reported next week, that was the catalyst for META’s reverse island.
The weekly PMO looks suspect, but we do not have a negative divergence as we did with META.
NVDA has a large island formation to monitor as well. NVDA is set up far better than META and even AMZN. NVDA’s PMO has already turned back up on the short-term resolution of a double bottom formation. There is no OBV negative divergence. We don’t expect a gap down resolution at this time.
We don’t really see a strong negative divergence on PMO tops and the weekly PMO has bottomed above the signal line in bullish fashion. NVDA isn’t necessarily out of the woods, but the hype surrounding it will likely push price higher after its recent correction.
Conclusion: META experienced a reverse island execution on earnings. Now we watch and wait to see what AMZN will do going into earnings as it is vulnerable to a gap down. NVDA doesn’t report again until next month and thus is not as vulnerable to a reverse island decline.
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