Learn the difference between a pullback and a correction, and what each means for market trends.

What is a Pullback?

A pullback is a short-term dip in price within a larger trend—typically an uptrend. It’s a temporary retreat as buyers pause or take profits before the trend continues. These are usually small declines, typically between 2% and 5%, and are considered a normal, healthy part of trending markets. Pullbacks often present opportunities to enter a trade at a better price.

➡️ Example: If the market is trending upward and then drops 3% before continuing higher, that’s a pullback.

What is a Correction?

A correction is a more significant decline, typically defined as a drop of 10% or more from a recent high. Corrections often occur due to increased uncertainty—such as poor economic data, geopolitical tension, or changes in central bank policy. While they can be unsettling, corrections are a common and necessary part of market cycles. If the decline goes beyond 20%, it’s usually considered a bear market.

➡️ Example: If a stock index falls by 12% from its recent peak, that’s a correction.

Main Difference:

• A pullback is a smaller, short-term drop within a trend.

• A correction is a deeper decline that may signal increased caution or a potential shift in sentiment.

1. Pullback (minor corrections):

• About 3%–5%

• Typical characteristics:

  • Short-lived

  • Usually considered healthy for markets

  • Often happens within a strong uptrend

  • Doesn’t typically indicate a fundamental shift

2. Correction:

• 10%–20% decline from recent highs

• Typical characteristics:

  • Reflects increased uncertainty or short-term negative sentiment

  • Can result from profit-taking, economic concerns, or external shocks

  • Usually considered a normal part of a market cycle

  • Historically frequent and generally not indicative of recession alone

3. Bear market:

• 20% or more decline from recent highs

• Typical characteristics:

  • Indicates more significant issues (e.g., weakening economy, sustained negative sentiment, monetary tightening)

  • Often, but not always, accompanied by recessions or significant economic slowdowns

  • Recovery takes longer, typically months or years

Relationship to recession:

• A bear market (20%+ decline) doesn’t necessarily guarantee a recession, but historically, such declines are commonly associated with recessionary environments.

• A mild recession is often correlated with declines around 15%–25%, but this isn’t a strict rule.

• Severe recessions, such as the Great Financial Crisis (2008–2009), often see declines of 30%–50% or more.

Specifically for Nasdaq 100:

• Due to Nasdaq’s heavy weighting in tech stocks, volatility tends to be higher.

• Corrections of 10%–15% are more common for the Nasdaq compared to broader indexes like the S&P 500, often without indicating broader economic downturns.

• Deeper corrections beyond 20% can indeed signal that investors expect a significant slowdown, economic stress, or recession fears, especially if accompanied by deteriorating economic fundamentals.

Summary of common thresholds: