The market rationale behind a trend pullback strategy

To understand the logic of trend and pullback, the trader must imagine market movements in terms of waves. Waves in financial markets represent the natural ebb and flow of price movements, influenced by market participants’ behaviors. By analyzing these wave patterns, traders and analysts can gain insights into market trends, identify potential reversals, and make more informed trading decisions. Let’s have a look at the example in Figure 6.1.

Figure 6.1 – S&P 500 Pullbacks

In Figure 6.1, you can see a monthly chart of the main USA stock index, S&P 500, which represents the top 500 stocks listed on USA exchanges. As you can see, despite a strong trend that started in March 2009, the market has formed several waves. These waves are sometimes modest, as shown by the ellipses on the left side of the chart, while other times they are deeper and longer-lasting, like in the ellipses...