What Is a Low Volume Pullback?
Let me explain what a low volume pullback is: it's a technical correction where the price moves toward an area of support, but this happens on lower-than-average volume. As a trader, you'll often see this as weak longs simply locking in their profits, not a sign of a full reversal.
Key Takeaways
- Low volume pullbacks occur when the price moves towards support levels on lower than average volume.
- Low volume pullbacks are often a sign of weak longs taking profit, but suggest that the long-term uptrend remains intact.
- High volume pullbacks suggest that there could be a near-term reversal.
Understanding Low Volume Pullbacks
You need to know that frequent moves against the trend on low volume are just normal fluctuations and usually not significant. But if you see a big spike in volume going the opposite way, that could mean the smart money is heading for the exits, signaling a potential reversal. Those are what we call high volume pullbacks.
Trading Low Volume Pullbacks
When you're trading, consider entering positions during the short-term weakness of a low volume pullback—it boosts your risk/reward ratio since stop losses can be placed closer to major support levels. If you're a long-term investor, these are chances to add to your positions at lower prices, reducing your overall cost basis and setting up for more upside.
Look at indicators like the on-balance volume (OBV) to spot where the trend and volume are diverging. If the price is trending higher but volume is dropping, it might point to a longer-term reversal because fewer longs are driving the move. High volume pullbacks also warn of a possible market reversal, so you might want to exit longs or lock in profits if you're invested long-term.
Remember, determining if a pullback is temporary or long-term involves multiple factors. Volume is reliable, but you should also check chart patterns, key support and resistance levels, and indicators like the relative strength index (RSI) or moving average convergence-divergence (MACD) to confirm.
Real-World Example of Low Volume Pullbacks
Take a look at this example from the SPDR S&P 500 ETF (SPY). The chart shows three low volume pullbacks in a strong uptrend, each followed by the trend resuming as weak traders took profits and bullish investors stepped in. Then came a high volume pullback that led to a longer reversal, with more volatility afterward as the market questioned the uptrend's strength.
Final Note
Keep in mind, this information isn't tax, investment, or financial advice. It's presented without regard to your specific objectives, risk tolerance, or circumstances, and it might not suit everyone. Investing carries risks, including potential loss of principal.
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