Low Volume Pullback

What Is a Low Volume Pullback?

A low volume pullback is a technical correction toward an area of support that happens on lower-than-average volume. Since the move happens on low volume, traders frequently attribute the pullback to weak longs locking in profits as opposed to a reversal.

Seeing Low Volume Pullbacks

Continuous moves that happen the other way of a trend, which are joined by low volume, are normal fluctuations and generally considered to be immaterial. On the other hand, a large spike in volume the other way of the trend could be utilized to signal that the smart money is starting to search for the exits and the trend is preparing to reverse. These huge moves lower are known as high volume pullbacks.

Trading Low Volume Pullbacks

Numerous technical traders will try to enter a position on the short-term weakness found in a low volume pullback since it expands the risk/reward ratio as stop losses are nearer to major support levels. Long term investors may likewise make a move to add to their positions at a lower price and diminishing the cost basis of their overall long positions, which sets out a freedom for more upside.

Traders will utilize indicators, for example, the on-balance volume (OBV), to track down situations where the trend and the volume are separating. On the off chance that the trend is moving higher and volume is decreasing, trades might search for a possibly longer-term reversal to happen since there are less longs responsible for pushing the stock higher. High volume pullbacks are likewise a sign that the market might be ready to reverse. In these cases, long traders might exit their positions and long-term investors might lock in certain profits.

Traders frequently take a gander at various factors while determining on the off chance that a pullback is brief or long-term. While volume is a solid indicator, it's likewise important to see chart designs, for example, key support and resistance levels, and technical indicators, similar to the relative strength index (RSI) or moving average convergence-divergence (MACD), to confirm these feelings.

True Example of Low Volume Pullbacks

Here is an illustration of a series of low volume pullbacks in the SPDR S&P 500 ETF (SPY):

The chart shows three low volume pullbacks happening inside a critical uptrend before a high volume pullback that signaled a more prolonged reversal in price. Each low volume pullback was followed by a subsequent resumption of the overall trend, as weak traders forgot about profits before additional bullish investors entered the market. By comparison, the high volume pullback went on for several days and the ETF was considerably more unstable in the aftermath as investors questioned whether the long-term trend was still in place.

Highlights

• High volume pullbacks propose that there could be a close term reversal.
• Low volume pullbacks are much of the time an indication of weak longs taking profit, however recommend that the long-term uptrend stays in one piece.
• Low volume pullbacks happen when the price moves towards support levels on lower than average volume.