what does a pullback tell you 
pullbacks are widely seen as buying opportunities after a security has experienced a large upward price movement for example a stock may experience a significant rise following a positive earnings announcement and then experience a pullback as traders with existing positions take the profit off the table i e selling some or all of their long positions the positive earnings however are a fundamental signal that suggests that the stock will resume its uptrend 1most pullbacks involve a security s price moving down to an area of technical support such as a moving average pivot point or fibonacci retracement level before resuming the uptrend traders should carefully watch these key areas of support because a breakdown from them could signal a reversal rather than simply a pullback example of how to use a pullbackpullbacks typically 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 long positions 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 2022in 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 should be sure to use several different technical indicators when assessing pullbacks to ensure that they don t turn into longer term reversals the difference between a reversal and a pullbackpullbacks and reversals both involve a security moving off its highs but pullbacks are temporary and reversals are longer 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 a stock s net present value similarly it could be a negative settlement a new competitor releasing a product or some other event that will have a long term impact on the company underlying the stock these events while happening outside the chart so to speak will appear over several sessions and initially will seem much like a pullback traders use moving averages trendlines and trading bands to flag when a pullback keeps going and is at risk of entering reversal territory limitations in trading pullbacksthe biggest limitation of trading pullbacks is that a pullback could be the start of a true reversal being that both pullbacks and reversals happen on a range of timeframes including intraday if you want to go granular one trader s multisession pullback is actually a reversal for a day trader looking at the same chart if the price action breaks the trendline for your time frame then you may be looking at a reversal rather than a pullback in this case it 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 