Corrections After Price Makes a New High or Low

🔹 What is a Correction?

• A correction is a temporary price movement against the main trend.
• It usually happens after the price makes a new high (in an uptrend) or a new low (in a downtrend).
• Corrections are short-term pullbacks, not full reversals.

🔹 Key Characteristics of Corrections

1. Counter-Trend Move

• In an uptrend, corrections are pullbacks (price falls temporarily).
• In a downtrend, corrections are rallies (price rises temporarily).

1. Depth

• Corrections often retrace 10%–30% of the previous move, but this can vary.
• If the price moves much deeper, it may indicate a trend reversal, not just a correction.

1. Duration

• Corrections are usually short-term compared to the main trend.
• Can last days, weeks, or months, depending on the market.

1. Purpose

• They allow the market to “cool off” after a strong move.
• Give traders and investors opportunities to enter at better prices.

Reference: Trade by SCI

🔹 Example 1: Uptrend with Correction

1. Stock rises from \$100 → \$150 (new high).
2. Price pulls back to \$135.

• This is a correction (a short-term decline).

  1. Stock then rallies to \$160.

• Confirms the uptrend is still intact.

🔹 Example 2: Downtrend with Correction

1. Stock falls from \$200 → \$120 (new low).
2. Price bounces up to \$140.

• This bounce is a correction (temporary upward rally).

  1. Stock then drops to \$100.

• Confirms the downtrend is continuing.

🔹 Correction vs. Reversal

• Correction = temporary move against the trend, trend continues afterward.
• Reversal = change of direction; the main trend actually ends and a new trend begins.

Feature	Correction	Reversal
Duration	Short-term	Long-term
Trend Impact	Trend continues after pullback	Trend changes direction
Depth	Usually 10–30% retracement	Often 50%+ or full move break

🔹 Why Corrections Matter?

• Help traders identify buy opportunities in uptrends and sell/short opportunities in downtrends.
• Prevent traders from panicking when price temporarily moves against them.
• Distinguish between healthy pullbacks vs. major trend shifts.