By Jeff Cooper

The island reversal is a powerful technical tool. However, the classic island reversal, where a stock gaps up to a new relative high but the subsequent session gaps down leaving a high below the prior days low, occurs infrequently. Even given decimalization, the pattern is likely to remain somewhat rare.

Hence, I created the Gilligan’s Island in order to capture reversals in the spirit of the one-day island exhaustion pattern. The Gilligan’s Island is explained in my first book, Hit and Run Trading. Essentially, it occurs when a stock gaps up to a 60 day high but closes poorly (in the bottom 25% of the range). Gilligan buy signals are a mirror image.

Now let me introduce you to Gilligan’s cousin, Fantasy Island. A Fantasy Island sell signal occurs when a stock laps or jumps up above the prior days close but below the prior days high, scores a new 60 day high on the day, but sells off, closing down on the day in the bottom 25% of the range. (For buys, simply reverse the rules). Due to decimalization, the lap required to generate Fantasy Island should be meaningful, not pennies. I typically want to see at least a 50-cent lap.

There are reversals and then there are reversals. Many tops (and bottoms) are Gilligans or Fantasy Islands, but not all Gilligans or Fantasy Islands are tops (or bottoms). I am going to show you how I determine which signals are meaningful. Sometimes very meaningful. The important thing to remember is that stocks turn on a dime; most trades cannot. The sudden reversal of strongly trending stocks often leaves investors stranded and money managers shipwrecked. Hence, then name Gilligan’s Island. Its sometimes less conspicuous relative, the Fantasy Island, can leave market participants equally marooned.

On December 6th, 2001, Imclone Systems (IMCL), one of the leading biotech stocks, lapped open and ran up to score a new 60-day high only to reverse by the end of the day. A look at the daily chart shows that IMCL closed at the low of the day and substantially below the prior days close after lapping up and hitting a new 60-day high, setting up the Fantasy Island sell. Of course, as always, follow-through is required to confirm a signal. Bearishly, the reversal was also a Lightning RodTM (LROD) as well as a Soup NaziTM. The Soup Nazi, as in No soup for you! (from the character on the Seinfeld show) occurs when a stock makes a new 14-day high, pulls back and fails on a test of that high. Keep in mind that the previous 14 day high to a test failure must have occurred at least 4 sessions earlier in order to avoid stepping in front of an obvious continuation move.

When multiple signals occur, there is a greater than average likelihood of the signal being successful. In this case, we had three reversal signals: A Fantasy Island, a Soup Nazi, and an LROD. When multiple signals occur, there is the likelihood for a larger than average move to play out. When a signal (or multiple signals) occurs at a natural inflection point in time and price, often a major trend develops.

Let’s explore what I mean by a natural inflection point in time and price. W.D. Gann, the legendary trader and market conceptualist, believe that all tops and bottoms of consequence were mathematically related, or vibrated off, each other. He believed that a cause and effect relationship existed between tops and bottom of various durations much in the same way a rock thrown into a pond corresponds to its counterpart ripples. One of the tools Gann used to observe the vibrations between tops and bottoms is the Square of Nine chart or what I refer to as the Wheel of Price and Time. The square of the first odd number, 3, equals nine and completes the first square, or cycle, in the Square of Nine chart. Hence, the name Square of Nine chart. Since the number 1 squared equals itself, it is not counted. The Square of Nine is essentially a grid of numbers starting with 1 in the center that spirals out in clockwise motion forming a vortex, or a 9, similar to the Milky Way or a nautilus shell. As I mentioned, the first cycle, circle, or square around the center is complete with the number nine. Once you find the ‘zero’ point from which stocks’ ripples emanate, the geometry for potential highs and lows in the future can be determined. It is important to keep in mind, however, that one must not only use the all-time highs and lows on the yearly chart, but also the closing highs and lows on the daily, weekly, and monthly chart when projecting price cycles.

A look at the weekly chart of IMCL shows an important low in March of 2001 at 23.87. 23 is on the important cardinal cross of the Square of Nine chart (the north to south and east to west vectors). The weekly chart shows that one cycle up, or 360 degrees plus 90 degrees (for a total of 450 degrees) equals 53 on the same vector as March 21st and marked the closing weekly high in June of 2001. June is 3 months or 90 degrees of the year from March. Ninety-degree movements in time and price are a natural area to look for support, resistance, or in some cases, possible acceleration. It is the behavior after 90 degrees of growth that must be observed. As you can see, opposition the June time frame or 180 degrees in time from June, in December 2001 marked the termination of the advance from the March 2001 low. A period that consumed nine months (270 degrees of the year — 2 plus 7 equals 9).

Notice that, bullishly, IMCL initially rallied past 46, which represented the first cycle of 360 degrees from low. That suggested that after a pullback, a further advance might be expected. The initial 46 resistance pretty much contained the nine-week pullback. Interestingly, for that nine-week period, IMCL never closed below 46 on the weekly closing chart by more than a point and change. On those occasions, the closes were as follows: 45.99 on the week ending June 22, 2001. 45.50 on the week ending July 13, 2001. 45.81 on the week ending August 3, 2001. 44.88 on the week ending August 10, 2001. 45.50 on the week ending August 17, 2001. Not too shabby. Such is the power of the squares.

To recap, off the March low, IMCL found high 450 degrees up in price and 90 degrees out in time. Then the stock pulled back for 7 to 10 weeks and 90 degrees in price before commencing on a new leg. Just happenstance?

On the next leg up, note the consolidation at 61, which was 540 degrees up from the low price. Note also that IMCL first hits 61 on September 20th, precisely 180 degrees in time from the March low. Ultimately IMCL reached 75.44, making a grasp for 77, which represents two full cycles of 360 degrees from low. 77 is 720 degrees up from 23 and also is on the vector crossing between June and December. This is how the June and December highs are related and square out in time and price.

As shown on the monthly chart, the all-time monthly closing high for IMCL was 77.21 on the month ending February 2000. From the all-time monthly closing high, IMCL shows a rally peak 36 weeks, or six squared weeks later, to the week ending November 3rd 2000 leading to a major reversal. From the week ending March 23rd, 2001, counting out 36 weeks gives the week ending November 30th, 2001, the high weekly close prior to its recent collapse from 75 to 17 in seven weeks. Gann used to say that panics play out in sevens. It will be interesting to see what happens with IMCL in the coming weeks. The yearly chart has now turned down and from the weekly closing high in December of 72, 720 degrees down is 20.50. Friday’s close, 21.14, which is close enough for government work.

In summary, putting the pieces together, the reversal signals of the daily chart combined with the Iguana sell signal on the weekly chart at the December high (a new 10-week high that leaves a tail) proved the math that connected the dots on the Wheel of Time and Price. I think you will agree that, indeed, symmetry exists in the markets.

Jeff Cooper is a full-time professional equities trader. A graduate of New York University, he is also the author of Hit & Run Trading, Hit & Run Trading II, Hit & Run Lessons, and the comprehensive video course, Jeff Cooper on Dominating the Day Trading Market. For information about how to subscribe to Jeff Cooper’s nightly newsletter services, go to The Trading Reports.