Common pullback patterns

Posted by professor at March 6th, 2014

Pullback patterns occur whenever prices fall a fair amount from their recent peak and are used in many stock trading strategies.

They usually offer a great opportunity to join the upward trend since most trends will pullback or correct numerous times during its duration. However, a trader must always be weary that the pullback does not turn into a major change in trend and he or she must have the skill to change direction quickly if the situation occurs.

Although they are fairly easy to spot, pullback patterns sometimes appear in a number of different guises depending on the time frame of the chart and the market. Generally, though, a pullback pattern will not be more than a 33% correction in the market. Any more than 30%, if not a major change in trend, is better described as a crash or reversal.

Low volume pullback

The low volume pullback is something every trader needs to be aware of – when holding a position as well as when looking for a new entry.

When holding a position, a low volume pullback can be slightly unnerving since the market is declining and there is very little fundamental reason behind the move. The important thing to remember is that price moves on low volume are typically less important than price moves on big volume. Since less traders are in the market, price moves tend to be more exaggerated due to the lack of liquidity. In this instance, a trader needs to remain confident that his or her trade will recover quickly.

When looking for a new position, the low volume pullback offers an excellent entry point. The low volume signifies that the trend is still intact, nothing has changed, whilst the drop in price offers a better place to buy.

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Longer term pullback

Some pullbacks can take place over just a few minutes and are useful for day traders to enter positions, while others can last over weeks or months and therefore bear more similarity to retracements. The Measure Move (bullish) is one pattern that occurs regularly during the mature phases of bull markets and it typically consists of two or more strong up trends and one pullback in between period that can last over several weeks or months.

The Measure Move often begins with a strong downward trend and is then followed by an equally strong up trend. This move is then followed by a pullback that can last several weeks and can begin to look like an asymmetrical or wedge pattern. It can also look like a flag or rectangle pattern if the downward momentum is slowing.

As this occurs, it normally signals the end of the correction, and once a breakout occurs, another bullish uptrend typically resumes.

Unlike the low volume pullback, volume should increase at the beginning of the reversal before decreasing as the pullback comes to an end and then increasing again when the second bull phase begins.