What is a pullback rally?

A pullback is a short-term reversal phenomenon where a stock or an index corrects or rallies after witnessing a one-sided move in the opposite direction.

For example, if a stock is seeing a healthy correction after a long-term upward trend in a stock or an index, then the pullback 

So whenever a chart portrays a rally on breakout, it does also provide intermittent corrective moves. So, if you are someone who is new to the concept of pullbacks, use the following key parameters to ascertain the trend reversals.

Volume is the first parameter to study a pullback. Trading volume drops significantly in case there is slowdown in the momentum. However, in case, volume is picking up, it could indicate a change in trade.

Second is news driven triggers. Negative news can trigger a sudden sharp fall in the underlying. But, the price tends to reverse once clarity emerges on the news development.

The third parameter is support and resistance levels. Pullbacks can continue till a level where there is strong buying interest and buyers are picking stock due to attractive pricing.

Now that we have understood the key triggers of a pullback, let’s understand …

A pullback will show a peculiar chart structure with volumes staying sideways.

As can be seen in M&M’s chart, lower volumes show consolidation, with the stock taking support around Fibonacci retracement.

In such a scenario, one can blindly look at accumulating the stock.

However, one needs to be cautious as a biased interpretation of a pullback may result in losses and fear of capitulation. The corrective may turn into a negative if crucial supports are breached with aggressive volume. It’s better to exit the stock during such times.

So, how can you ride the market pullbacks and be sure when to exit or enter a stock? Well, technical indicators can help you do this.

Occasionally, technical indicators assist in identifying a pullback. The most significant is the price action on tech chart. If one sees the Relative Strength Index (RSI) falling from overbought condition but no significant fall in stock price, it may be interpreted as a negative divergence. It is better to wait at this point in time rather than buying the stock.

Similarly, the Moving Average Convergence Divergence (MACD) makes a negative crossover with price, which exhibits a sideways trend. In both these situations, significance should be given to the price movement and moving averages. On pullbacks, these averages will not show weakness or turn downward, instead they will gradually continue their current trend and hold the price momentum.

A pullback clearly suggests that the continuation trend is intact and the price should witness buying momentum at higher levels. Further, pullback lows are crucial buying levels that set the base for the next upside. Till the stock holds these levels, the bigger trend remains highly optimistic. A trader should keep in mind while trading with a pullback strategy is one’s risk appetite. Failure to exit a wrong trade may create disparity and damage the overall performance.