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Pullback: What It Means in Trading, With
Examples
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TABLE OF CONTENTS
TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC
EDUCATION
Pullback: What It Means in Trading, With Examples
By BRIAN DOLAN Updated August 04, 2024
Reviewed by SAMANTHA SILBERSTEIN
Part of the Series
Guide to Technical Analysis
What Is a Pullback?
A pullback is a brief decline or pause in a generally upward price
trend of a stock or other asset. Investors who are confident that the
pullback will be brief use it as a buying opportunity. A pullback can
occur for many reasons, some of which are unrelated to the
fundamentals of the stock.
Technical analysts, who track the price movements of stocks to
establish trends, identify the "support level," or lowest price that a
stock is likely to reach before buyers step back in.
KEY TAKEAWAYS
A pullback is a temporary reversal in the upward price trend of a stock
or other investment.
A pullback typically lasts only a few consecutive sessions.
Pullbacks can provide an entry point for new investors when other
technical indicators remain bullish.
Investors can use limit orders or stop entry orders to take advantage
of a pullback.
What Is a Bitcoin Pullback?
The most volatile assets tend to experience the most severe
pullbacks. Cryptocurrency traders respond to the same pressures that
influence stock traders, plus others that are unique to the
cryptocurrency world. The price of a Bitcoin dropped more than 10%
in the week that ended on Aug. 2, 2024. The same day, the Nasdaq
closed at 10% below its record level, officially entering correction
territory.
1
What Does a Pullback Tell You?
A pullback is similar to a retracement or consolidation, and the terms
are sometimes used interchangeably. The term pullback is usually
applied to short-lived price declines—only a few consecutive sessions
—before the uptrend resumes.
Pullbacks are widely seen as buying opportunities if the stock has
been showing a generally upward price movement.
For example, many stocks experience a significant increase after a
positive earnings announcement, followed by a sharp pullback as
traders sell shares to take profits. Others step in to buy, seeing the
positive earnings as a fundamental signal that the stock will resume
its uptrend.
2
Most pullbacks end when the stock's price drops to a level of
technical support, such as a moving average, pivot point, or Fibonacci
retracement level. Traders carefully watch these movements,
because a breakdown from the support levels could signal
a reversal rather than a pullback.
Example of How to Use a Pullback
Pullbacks don’t change the underlying fundamental narrative that is
driving the price action on a chart. They are usually profit-
taking opportunities following a strong run-up in a security’s price.
For example, a company may report blow-out earnings and see
shares jump 20%. The stock may experience a pullback the next day
as short-term traders lock in profits by selling some of their shares.
However, the strong earnings report suggests that the business
underlying the stock is doing something right. Buy-and-hold traders
and investors will likely be attracted to the stock by the strong
earnings reports, supporting a sustained uptrend in the near term.
Every stock chart has examples of pullbacks within the context of a
prolonged uptrend. While these pullbacks are easy to spot in
retrospect, they can be harder to assess for investors holding a
security that’s losing value.
Image by Sabrina Jiang © Investopedia 2022
In the example above, the SPDR S&P 500 ETF (SPY) experiences
four pullbacks within the context of a prolonged trend higher. These
pullbacks typically involved a move to near the 50-day moving
average, where there was technical support, before a rebound higher.
Traders often check several different technical indicators when
assessing pullbacks to ensure that they're unlikely to turn into longer-
term reversals.
The Difference Between a Reversal and a Pullback
Pullbacks and reversals both involve a security moving off its highs,
but pullbacks are temporary and reversals are long-term.
So how can traders distinguish between the two? Most reversals
involve some change in a security’s underlying fundamentals that
force the market to re-evaluate its worth.
For example, a company may report disastrous earnings that make
investors recalculate the stock’s net present value. Or, a competitor
could release a superior product. Many events can have a long-term
impact on the company underlying the stock.
These events will appear over several sessions and initially will look
like a pullback.
Traders use moving averages, trendlines, and trading bands to flag
the point at which a pullback could continue, and enter reversal
territory.
Limitations in Trading Pullbacks
There's no perfect method to distinguish a pullback from a reversal.
For a few critical sessions, they look identical.
If the price action breaks the trendline for your time frame, you may
be looking at a reversal rather than a pullback.
This is not the time to enter a bullish position. Of course, adding other
technical indicators and fundamental data scans to the mix will
increase a trader's confidence in distinguishing pullbacks from true
reversals.
How Can I Tell if a Stock Price Decline Is a Pullback or a Reversal?
The first place to look is at the fundamental story behind the uptrend.
Presumably, you had reasons to buy shares of that stock. Are those
reasons still good?
Was the price decline caused by negative news about that company?
Or did the stock just get caught in an overall market decline?
You can also monitor key technical support levels to see if they hold.
If the price continues to decline, you might be looking at a more
significant correction or even a reversal.
How Can Investors Take Advantage of a Pullback?
Look at the fundamental story underpinning the uptrend. If nothing
serious in the way of bad news has hit the security, you're likely
looking at a mild pullback.
Traders can use a variety of orders to take advantage of short-lived
price drops. They can buy shares immediately using a buy market
order or put in a limit buy order that will be triggered at a lower price.
In case prices move higher, traders can place a stop buy entry order
at a level above the current price.
How Can I Tell If an Uptrend is Ending or Simply Undergoing a
Pullback?
Double-check to make sure nothing has changed in the fundamental
picture of the underlying stock.
Next, take a look at trend and momentum indicators (e.g., relative
strength index or RSI, average directional index or ADX, moving
average convergence divergence, or MACD) to see if they're turning
lower, potentially signaling a more significant decline.
If either of these conditions is met, take a step back and consider
whether the uptrend has hit a significant high and tighten up your
stop-loss sell order to minimize potential further losses.
The Bottom Line
Pullbacks are a normal part of any sustained uptrend. They can be
triggered by profit-taking after a sudden surge higher in the price of a
security, or minor negative news about the underlying security. Or
maybe it's just a bad day on Wall Street for all concerned.
Trend-following traders frequently use pullbacks to get in on the
dominant uptrend or to buy more shares of a long-term winner. They
can do this through buy limit orders, stop buy entry orders, or just a
plain market order if they prefer to jump right in.
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ARTICLE SOURCES
Part of the Series
Guide to Technical Analysis
Technical Analysis of Stocks and Trends Definition
Key Technical Analysis Concepts
Dow Theory
Support and Resistance Basics
Support (Support Level)
Resistance (Resistance Level)
Trend
Pullback
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Breakout
Reversal
Overbought
Oversold
Relative Strength
Candlestick
Volume
Gap
Getting Started with Technical Analysis
Essential Technical Analysis Strategies
Technical Analysis Patterns
Technical Analysis Indicators
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