Pullbacks vs Reversals
By the end, you can distinguish a normal pullback from an actual reversal.
A runner catching their breath. A pause to breathe (pullback) isn't quitting the race (reversal). One is a rest within the move; the other is a change of direction.
A rally inside a downtrend is not automatically a reversal. It may just be sellers taking a break before continuing. The same goes for a dip inside an uptrend.
A pullback becomes a possible reversal only when structure changes — e.g. in a downtrend, price makes a higher high and a higher low. Until then, a countertrend move is a pullback, not a new trend.
“It's rallying — the downtrend is over, I'll go long.”
“This rally hasn't made a higher high yet. Until structure changes, it's a pullback in a downtrend, not a reversal.”
A rally appears in the middle of a clean downtrend. By default it is…
- Countertrend moves are pullbacks by default.
- A reversal needs a structure change, not just a bounce.
- Don't promote a pullback to a reversal early.
Up next — Sometimes neither side is in control at all. Next: consolidation.