The capital market globally is known to offer investors an opportunity to earn a higher rate of return. However, understanding market dynamics helps investors to increase their market gains. Let’s look at the event of Pullback.
Pullback: Meaning
A temporary price drop or a reversal in a security or an asset's upward price movement is termed a pullback. Typically, pullbacks last for a few consecutive trading sessions only. Subsequently, the uptrend in the security prices resumes.
Open Your free Demat Account in just 5 minutes!
A price drop for a more extended period is considered a reversal, which usually involves a change in the security’s fundamentals. For example, a company’s reported low earnings often lead to a re-evaluation of the stock by investors.
What causes Pullbacks to happen?
Profit booking: Often, during an uptrend of a security or an index, investors tend to book profit and exit the market, causing a temporary drop in prices.
News of poor performance of significant companies: Reports of poor quarterly results of specific companies can lead to a change in perception by the investors; large-scale selling of the concerned securities may cause a drop in prices.
Fiscal policy changes: Sometimes, new directives by the Federal Reserve Banks can alter companies' short–term performance prospects, leading to a pullback.
Other reasons: Securities index technicalities or a changed political environment can also cause pullbacks.
How to spot a Pullback?
- Stock Volume: A pullback is usually accompanied by a considerable drop in stock trading volume. In case the trading volume increases, it may indicate a decrease in prices over a more extended period.
- Industry News: Negative pieces of information typically trigger price decline. Corrections will depend on perceptions changing with the clarity of information /events.
- Price levels: A proper analysis of the previous trading day trend and the price levels that buyers consider attractive can influence a pullback strategy.
Analytical tools like the Relative Strength Index and the Moving Average Convergence Divergence are often used to track pullbacks.
Can I benefit from Pullbacks?
Timing is the essence of making gains in the capital market. A thorough understanding of pullback dynamics will facilitate your returns. However, taking the guidance of industry experts is a better option considering the operational technicalities.
Motilal Oswal, for example, has been a market leader in creating investors' wealth for more than 30 years. You can join over 10 million satisfied customers to avail the entire gamut of online investment services. From AI-powered investment advice to portfolio rebalancing and more, Motilal Oswal has a service for every investor.
The final Word
Pullbacks in a capital market are often considered a welcome correction for a security/index in the long-term uptrend. However, it is crucial to identify pullbacks and invest opportunistically for a significant return on your investment.
Related Articles: Covered Call Strategy for Options Trading | All You Need to Know About the Covered Put Strategy | Options Trading With Iron Condor Strategy | Iron Butterfly Vs Iron Condor Trading Strategies