Both SPY (S&P 500 tracking ETF) and QQQ (Nasdaq 100 tracking ETF) have gapped down to open below yesterday’s candlestick, creating a potential Island Cluster Top in both. Island Cluster Tops are reversal patterns that come at the end of an uptrend consisting of a candlestick (the “Island”) surrounded by gaps on each side.

I am referring to these only as potential Island Tops as to finalize these patterns, ideally, both QQQ & SPY will need to close below yesterday’s closing prices today and not trade much beyond the midpoint of yesterday’s candles throughout today’s session*. While these patterns may or may not be finalized today and even if so, they may or may not be the catalyst for a significant trend reversal/correction, I can say that Island Tops, especially when confirmed with other potentially bearish technical developments such as those in the charts at this time, offer attractive R/R shorting opportunities.

A partial or full short entry at or below yesterday’s low with a stop above yesterday’s highs would result in a minimal loss if stopped out (just over 1/2%) with a profit potential of at least 3% and quite possibly much more. I’m passing this along as an unofficial trade idea for now as I’d still like to see some additional evidence before adding QQQ as an official trade, at which point price targets would be included.

* A ‘textbook’ Island Top pattern would have two gaps on each side of the topping candle or cluster of candlesticks. However, this algo-dominated market doesn’t do “easy” and as such, I suspect they will make a run at & slightly above the tops of yesterday gaps to run the stops on those that shorted the gap downs today. As such, I’d put good odds on a move slightly above yesterday’s close before the markets continue lower.