Low Volume Pullback
- A technical correction toward an area of support that occurs on lower-than-average volume. The low volume is a signal to traders that the trend is not reversing and that it is only the weak longs looking to lock in a quick profit. Frequent moves that occur in the opposite direction of a trend, which are accompanied by low volume, are normal fluctuations and generally deemed to be insignificant. On the other hand, a large spike in volume in the opposite direction of the trend could be used to signal that the smart money is starting to look for the exits and that the trend is getting ready to reverse.
Many technical traders will try to enter a position on the short-term weakness seen in a low volume pullback because it increases the risk/reward ratio as stop losses are closer to major support levels. It is common that large changes in volume will precede a price move. Traders will use indicators, such as the on-balance volume (OBV) to find situations where the trend and the volume are diverging.
Investment dictionary. Academic. 2012.
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