Pullback or reversal?
A pullback is a temporary move against the trend that leaves the structure intact. In a reversal the structure breaks: the last important low or high is lost. The two look the same at first; where the move stops makes the difference.
What is a pullback?
In an uptrend, price makes a new high and then moves lower for a while. This decline runs against the trend, but it does not mean the trend is over. If price stops above the last important low and rises again, what happened was a pullback.
In a reversal, the same decline reaches below the last important low and closes there. The sequence of rising highs and lows is broken. The same holds the other way round in a downtrend: a bounce that stays below the last important high is a pullback, while a close above it is a possible reversal.
Same decline, different outcomes
In an uptrend, price has started to fall from a new high. Depending on where the move stops, three pictures can follow.
Pullback
The decline stops above the last important low and price rises again to a new high. The structure holds.
Reversal
Price closes below the last important low, then makes a lower high that fails to reach the previous one. The structure is broken.
Not yet clear
Price pauses inside the zone of the last important low. Neither a hold nor a break is clear yet.
How deep do pullbacks go?
- The depth of a pullback is often expressed as a proportion of the previous rise (or fall).
- Technical analysis texts often cite roughly a third to two thirds of the previous move. This is a rough observation, not a rule.
- In strong trends pullbacks can stay shallow; in slower trends they can come close to the previous low.
- Depth alone does not decide it. A very deep pullback can keep the structure, and a shallow-looking move can be the first step of a reversal.
What decides it is not the percentage but whether the last important low or high holds.
What it shows, what it does not prove
What it shows
- Whether the counter-move has broken the structure so far
- The level at which the structure would count as broken (the last important low or high)
- Whether the move has stayed inside the previous trend or left it
What it does not prove
- That the trend will continue after a pullback that keeps the structure
- That a single close below the last important low is a lasting reversal
- Where the pullback will end; that is only visible afterwards
The MarketLevelMap view
How it relates to zones
Pullbacks often reach a support zone, frequently the area of a previous high or low. A reaction at that zone can be read as a hint that the pullback may end with the structure intact.
Reading the last important low as a zone rather than a single price makes the distinction sounder. A wick into the zone is not yet a reversal. To speak of a reversal, the close should come below the zone's lower edge and the next bounce should fail to reach the previous high.
Often confused with
For general information only. Not investment advice.Last updated: