How to Identify Pullbacks and Reversals: An Analysis with the SBI and L&T Charts

To timely identify a pullback or reversal of price is vital in day trading, whether it is in stocks, options, currencies, or anything else. That can give you much confidence to go for a trade or stay away from another, but there is no magical way you can easily identify it other than confirming it with some indications from your experience.

What are the most reliable ways to identify a pullback and a reversal? Or how can you differentiate a pullback from a reversal, or vice versa? In this article on pullback vs. reversal, I would like to share with you some commonly accepted factors that you can keep under watch to foresee the movements.

This article is prepared with hands-on references to the SBI and Larsen & Toubro charts, so I hope it will be more helpful for a beginner to understand the situation well and start learning things with more clarity.

What is a Pullback?

Technically speaking, a pullback is often identified as a situation when the market retraces into either a demand or supply zone, reverses quickly in a short period of time, and resumes the continuing momentum.

In both an uptrend and a downtrend, there will obviously be multiple pullbacks as the market moves on. As per the demand and supply concept in the stock market, a pullback happens to fulfill pending orders in the order block – either supply or demand zones.

A pullback will be nullified as either a consolidation (accumulation and supply, respectively, in an uptrend and a downtrend) or a reversal by breaking some levels, so what is a reversal?

What is a Reversal?

Technically, a reversal is often referred to as a situation when the market breaks down either a demand or a supply zone and makes a movement opposite.

As per the supply and demand theory, it happens when there are no pending orders in the zone, or, in other words, when the freshness of the zone is lost with no pending orders.

By the way, sudden reversals may often end up in consolidation before another notable movement in prices.

Pullback vs. Reversal: How to Identify the Differences

Here, I would like to introduce you to some commonly followed steps to help identify market movements and decide whether a particular move is a pullback or reversal.

I would like to describe this with reference to the charts of SBI and Larson & Toubro in the Indian stock market.

I don’t vouch for a 100% guarantee for any steps and indicators in the stock market, as mere technical analysis is not always supposed to help decide the movement of the stock prices, which are highly dependent on news, geo-political situations, quarterly results, company performance, and more.

1. Price Action

In my view, price action is the ultimate in trading. So if you have a keen eye for detail, you can watch how the price moves and identify a pullback or reversal simply by the price action.

More specifically, when the market goes up, it will create higher highs and higher lows one by one until the momentum ends.

While making every step up, there will obviously be a pullback, and when the momentum fails, you can see a reversal, which you can identify as the price breaks down the last swing low.

Warning: It doesn’t mean you can punch a short trade as soon as the swing low is broken. I usually plot the Fibonacci retracement tool to confirm the movement before entering a short trade. 

Screenshot: Have a look at the below one-hour chart of the State Bank of India from July 23 to August 7, 2023, for a clear view of the situation.

The same situation happens in reverse when it comes to a reversal from a downtrend. Here, the market breaks out the last swing high before making an uptrend.

Warning: It is again for educational purposes only. You can’t go long as soon as the level is broken, as mentioned here. Just have multiple confirmations before putting your money into the job. 

Screenshot: Check out the daily timeframe chart of Larson & Toubro from March 25 to August 24, 2023, to see a change from a downtrend to an uptrend.

2. Fibonacci Confirmation

If you plot your Fibonacci retracement tool in the above SBI chart, you can confirm the reversal signal more clearly. (See the screenshot below).

The drop in price below the 0.5 and 0.618 levels of Fibonacci strongly confirms the reversal.

So every time you see a trend in price action, you can apply the Fibonacci tool, whether there is an uptrend or a downtrend, and confirm the market move before placing an order.

3. Volume Analysis

As always, volume is another key factor that you can rely on to confirm your conviction about pullbacks and reversals.

A pullback will clearly be identified with the state of volume in line with the price action.

See, if you have the market going up, you can see narrow volume bars while the market retraces for a pullback, and the volume bar will get thicker and stronger when a reversal happens.

The color of the volume bars, whether red or green, depends on the direction of the market, but you can strongly rely on the volume signals to confirm your views on pullbacks or reversals.

Screenshot: Below is the volume bar of the SBI chart for the same period. It is an uptrend to a reversal movement.

(The volume is presented in both traditional columns and area bars to let you easily identify the movements)

Screenshot: Below is the volume bar of the L&T chart for the same period. It is a downtrend to a reversal movement. 

Warning: Identifying the pullbacks and reversals with a mere view of the volume bars is difficult. Volume reading should be done along with price action. You can check the SBI and L&T charts for the same period on your terminal or TradingView to clearly understand the movements.

4. Candle Reading

Last but not least, perfect candle reading has an important role to play in identifying a pullback or reversal. Candle reading is indeed the very basic thing in trading. As efficient as you are at reading candles, so capable are you at making money from the market.

While working to confirm a pullback or reversal, candling reading has indeed a lot of importance, as you can check the momentum of candles in your timeframe and compare it against the before and after candles.

It is simply like that: if you see a strong red candle after the breakdown of a demand zone, you can foresee a reversal.

In the same style, if there is a strong green candle after the breakout of a supply zone, there can be a reversal in the other direction.

5. Zonal Freshness

Finally, I would like to explore the factor of zonal freshness, which is more applicable in short-term and swing trades, I think.

This is actually a thing from the demand and supply trading strategy, where you get a relaxed opportunity to monitor the market with a strong conviction for a reversal or pullback.

I will explain it further here.

If the market tests a demand or supply zone (order block) multiple times, it is commonly assumed that the freshness of the same is lost. So in a higher time frame, which is why it is not for day traders, you can see if a particular order block is tested by the market multiple times.

If that is the case, the chance for reversal or breaking the levels is obviously higher than the chance for a pullback, which typically happens if there is freshness in the zone, which means minimal price tests.

So, in other words, if you have a strong demand or supply zone with freshness, wait for a pullback rather than a reversal.

Wrap Up

Overall, though the price action is the basic signal for identifying any movements in the market, you can use other factors like volume, indicators, and candle momentum to confirm the same.

The reliance on a particular signal or another one for identifying a pullback or reversal is highly dependent on the trading style of the trader.

If you are a beginner, you can try practicing trades on paper trading platforms like Neostox and hone your skills before you start to invest your hard-earned money in the market.